| An eNews Update to our Quarterly Newsletter |
Special Issue -September 18, 2008
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Special Newsletter to Fragasso Financial Advisors Clients and Friends Executive Summary
Please read on for the details that support this summary. Today’s Markets and You The current financial situation is serious and no one should try to minimize its possible consequences to the U.S. economy. But it should be viewed and actions taken with a solid economic and historic perspective, not one borne of panic. As this is written, the Federal Reserve Bank has supported giant AIG Insurance with an $85 billion guarantee. This follows a government sponsored take over of the Bear Sterns investment bank by J.P. Morgan and a complete government assumption of the Freddie Mac and Fannie Mae mortgage companies. Very importantly, the federal regulators chose not to assist and allowed the Lehman Brothers investment bank to fall into Chapter 11 bankruptcy from which Barclays Bank is buying the most viable parts of the company. Additionally without government assistance or guarantees, Merrill Lynch was bought by BankAmerica What does that mean and how did this cataclysmic series of events occur? More importantly, what might happen now? The regulators have not spoken about their motivation in supporting some economic institutions and not others, like Lehman or Merrill. But it seems clear that the experienced financial people who serve as the nation’s regulators are making a distinction between institutions that are central to the health of our economic system, which would make other institutions dependent on them for their survival, and those that are not. Lehman, it would seem, isn’t one of those so it was allowed to fail and have its assets sold off. In doing so, the government is providing capital and liquidity only where it is felt to be necessary for a righting of our economy and for recovery. This did not happen after the stock market crash of 1929. The government then did nothing and awaited market forces to act and we fell into the Depression of 1930-32. It was only after banking regulation that provided stability in capital and lending markets and an infusion of fiscal stimulus that the economy recovered. As a result, 1933 was the best stock market year of the 20th Century with the S&P 500 stocks up 54%. The economy fell into another leg of depression in 1937 over international tariffs, but that’s another lesson for another time, and the stimulus of World War II spending once again took us out of that downturn. Today’s institutional guarantees and fiscal stimulus has its roots in that period of time when we painfully learned the need for supportive action. And the lesson continued through the 1979 bailout of Chrysler that, in today’s dollars, would be multi-billions in direct support. Government intervention to save the U.S. economy in the late 1980s and early 1990s from the failure of 747 savings banks with more than a $160 billion direct bail out – in 1990 dollars – was another successful example. But there is an even bigger example of this that we don’t usually consider and that is the Marshal Plan implemented in Europe after World War II. Don’t skip over this paragraph because it’s starting to sound like ancient history! It applies right now. Europe was in ruins after the allies and Germany fought through its cities and country side. Think of Europe with a lack of food, electricity, water, sewage treatment and little ability to work for wages. It was exacerbated by the coldest winter in decades. People were dying and bodies were stacked like cordwood before being buried in mass graves. Look around you now as you read this. We’re a bit better off than that description. While Europe starved and Joseph Stalin was poised to take over Western Europe along with the East, the U.S. had 7 million servicemen coming home to factories that were shutting down with no need for continued war production. To whom were we going to sell our goods and services to put our people to work? The common wisdom was that the Depression would return to the U.S. Do you see why the Marshal Plan – the biggest bailout in history to that date costing $100 billion in today’s dollars – was so important? The U.S. was already deeply in debt as a result of financing the war. It took nine months to shepherd the plan through Congress and its implementation lasted for several years. But it worked! It ushered in the longest and most prosperous period in our history – one that made us believe we were destined to be forever on top economically. Now let’s look to today. We are in a far better position than we were in some previous periods. We have a government that is acting with conviction to support the economy. History would tell us that should work as well as in 1932, 1946 and in all of the similar crises since. What then is your and our part of this? Here is our suggestion. First, as individuals, we must galvanize our efforts, the way that our Greatest Generation acted in World War II, and take responsibility for our own outcomes through hard work and creative enterprise. As investors, we must view our portfolios as a means toward financial security over time, not as a castle under siege. We suggest that you discuss with us the continued applicability of the asset model we together have adopted for you with your unique goals, family responsibilities, time frame and risk tolerance level in mind. We at Fragasso Financial Advisors will continue to advise and guide you and we will continue to screen the investments that populate your portfolio for their ability to weather the rough seas we are experiencing. Consider the possibility that every period of disequilibrium creates opportunities in solutions. Would you have wanted to miss out on the economic boom that followed the Marshal Plan as well as after every economic crisis we have experienced in our country’s history? As we look forward, we do not believe that this stage of the economy’s troubles is the beginning of a black hole that will suck down all in its path. Rather we believe that we are in the latter stages of the catharsis of the economy’s previous excesses that are playing out in a Darwinian fashion for the players of excess. We believe that will lead, as always before, to a recovery. History would indicate that to be a period of months, not years. Hopefully from there, we will benefit from the corrective actions that will likely be instituted on certain types of investments, like hedge funds, which we never used for our clients, and a greater scrutiny of package and securitized instruments, which we also did not use for our clients. History and market data confirm that the asset allocation and diversification techniques we employ for our clients put them in line for the positive results the markets give to serious investors who consistently stay on a time-tested and panic-free course of action. We thank our clients who, in almost all cases, call to discuss their financial future in the way we have described here. We will continue to be here for you serving that function that looms even more importantly in trying times. Sincerely,
This article is for informational purposes
only and not intended as financial advice. Consult your financial
advisor to determine what is appropriate for your situation. If you have any comments, questions or suggestions concerning this
electronic newsletter, please email us at fgi@fragassoadvisors.com.
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