Manarin Investment Counsel, Ltd.

Earlier this week we were joined by JP Morgan Chief Market Strategist and one of our favorite economists, Dr. David Kelly, for the Manarin Investment Counsel spring wine and cheese client event.  Below are some highlights from Dr. Kelly's discussion on what led to the financial collapse and his take on the economy:

• The roots of the financial crisis were in the housing bubble of 2006 - 2007.  Hardly anyone believed that it would have as far reaching financial implications as it did.
• The use of leverage by hedge funds is what lit the fuse.  When the housing market collapsed, the leverage worked in reverse and put financial institutions in huge trouble.
• The government's biggest mistake was letting Lehman Brothers fail.
• Never underestimate the psychology of the economy.
• The three most dangerous words in economics are "Wait and see."
• You will not see again for many years mortgage rates below 5%. 
• Vehicle sales are at their lowest level since 1982 and housing starts are currently at one-third their normal level.  Demand will not allows for these figures to be sustained.  They will go up.
• Inventories are what initially start economic growth.
• Unemployment is the last thing to get fixed in an economy; it is a lagging indicator.  Historically it looks like a playground slide - very steep and quickly going up and then a gradual decline over time.
• Inflation is a risk in the long term but I don't think it is a risk in the short run. 
• I think the economy can recover by itself but it is not being allowed to because of lots of help from the government. 
• The good news about the American economy is that it knows how to grow itself; the bad news is that nobody knows how to grow it.
• Cutting interest rates in the teeth of a recession doesn't actually fix anything.
• One of the great dangers is that when the economy finally recovers everyone will give credit to the government and the Federal Reserve.  I think the American economy will prosper in spite of Washington rather than because of it.
• The reason you diversify is not because of the stuff you expect; it is for the stuff you don't expect that ends up biting you.
• How will the market do in the short term?  How could we possibly know?  All we know is that we don't know. 
• I think discipline is what is necessary to benefit in the long run during this economic climate.

From Roland:  What we've experienced is a generational opportunity and there is a very high probability that we will never see stocks as cheap as we did back in early March.  Look forward to brighter days ahead!