Mission Management & Trust Co.

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While we believe that the ultimate resolution of the debt crisis will involve significant levels of money printing and substantial inflation, we would be surprised to see that unfold over the next year or two. More likely, it will come further down the line. We consider a disinflationary–even deflationary–environment more likely in the short run, which would be best for top quality bonds. With yields so low, however, the reward for being right about bonds in the year ahead is relatively small.

Barely more than one-half of one percent per year has been made in stocks since the beginning of the century. We are pleased that our clients’ portfolios have grown by more than 65% over that time before fees, which vary by portfolio size. There have been two powerful rallies in the long weak cycle that began in 2000. The first, from 2003 to 2007, convinced many investors and analysts that the bear market from 2000 to 2003 was a stand-alone event and that the bull market that began two decades or more earlier was back in force.

In such an environment we continue to pursue a low risk investment approach. We expect volatility to rise in most investment markets, possibly very dramatically. Such volatility will likely provide far more attractive investment options than exist today. We want to maintain liquidity to take advantage of those expected opportunities. At the same time, we are attempting to maximize returns on essentially risk free short-term investments, and we continue to invest in the occasional security that appears significantly undervalued.

I have long maintained that some government agency appears to be directly influencing stock market prices when it serves government’s needs. Many have scoffed at that assertion, but there is broad conviction that the “Plunge Protection Team” stands ready to provide sizable bids at important moments. Increasingly, the myth of free markets is crumbling. We know that the Fed now buys 70% or more of newly minted U.S. debt. We know that several foreign central banks have discussed their own direct equity purchases to support market prices.

When we look at the current situation, we see a confluence of conflicting factors. Corporate earnings continue to grow strongly, and emerging economies are providing demand for many of the world’s goods and services. Governments and central banks are working overtime to provide stimulus to keep business humming. On the other hand, the reason they have to provide such stimulus is that the world’s crushing debt burden is throwing sand into the gears of much of the world’s economy. Several countries are insolvent and are being kept alive with outside funding.

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