The future belongs to those who prepare for it.the Great Wall of China

The MARKETLETTER

Feelings of Fear


Most of us know that the economic climate is dismal. We can all describe several examples of inflation, economic decline and human tragedy all around us. Unfortunately most of our observations would be true.

What do these distressing examples mean for the investor and what should we be doing in this environment? Before we can take action we should consider some more information about our situation, as a nation, since we all are in this boat together.

There are three news elements at the top of nearly every news alert:

Taking each one of these crises in order, we can try to find some perspective. Perspective does not make the crisis go away but to some extent we may be able to see that every situation can be compared to other times and places.

The Financial Crisis

All of us know that the subprime mortgage loans have caused losses for many people and created doubts about the viability of our financial system. A few large financial institutions have absorbed billions in losses. But consider the following information from the March 2008 quarterly report of the Federal Deposit Insurance Corporation (FDIC) that insures some of the deposits of nearly all commercial banks in the United States:

  1. The total net profits of reporting banks, 8,543 to be precise, increased in the first quarter of 2008 to $19.3 billion which is close to the average quarterly profit for banks in 2007. All news reports insist on a comparison with the same quarter of last year, before the crisis began, instead of comparing results to the fourth quarter of 2007. The first quarter is much better than the fourth quarter, but that is not very exciting for television.
  2. More that 99% of all reporting banks have capital reserves at the highest level measured by the FDIC. Even after recording loan losses, the capital of banks increased by $13.5 billion in the first quarter.
  3. In 2007 there were 3 bank failures; so far in 2008 there have seen 2 bank failures.
  4. 4. In the first quarter total bank assets increased by $335.4 billion, a 2.6% increase, of which most were new loans for normal business activities. This shows that the usual headline that banks have stopped lending, is again just for show.

The Energy Crisis

Because of the imbalance in our international trade accounts and in our domestic government operations accounts, the USA has borrowed money from many sources to pay for the excess of expenditures over governmental revenue. This kind of borrowing has been a way of life in the USA at least since the Civil War. During World War II the public debt as a percent to GDP reached 80%. It then fell consistently until the military build up during the Reagan Administration. With the wars in Iraq and Afghanistan, the ratio of Public Debt to GDP again rose to 60.8% in 2007 according to The World Factbook prepared by the US CIA. The USA at 60.8%, ranks 26th in the world behind Japan with 195.8%, Canada with 68.5%, France at 64% and Germany at 63.2%.

The Public Debt Crisis

Because of the imbalance in our international trade accounts and in our domestic government operations accounts, the USA has borrowed money from many sources to pay for the excess of expenditures over governmental revenue. This kind of borrowing has been a way of life in the USA at least since the Civil War. During World War II the public debt as a percent to GDP reached 80%. It then fell consistently until the military build up during the Reagan Administration. With the wars in Iraq and Afghanistan, the ratio of Public Debt to GDP again rose to 60.8% in 2007 according to The World Factbook prepared by the US CIA. The USA at 60.8%, ranks 26th in the world behind Japan with 195.8%, Canada with 68.5%, France at 64% and Germany at 63.2%.

While we may not be happy with a large public debt of about $9.5 trillion, we can see that all developed nations use debt as a standard management tool. We would also prefer to see the debt decline. For the time being though, the USA is not an outlier in terms of international financial management. This provides some cold comfort for our fear of being owned and controlled by foreign powers.

Fidelity Platform Fees

Fidelity Investments is developing an enhanced Wealth Management Program for its Registered Investment Advisers, such as Broadview Asset Management LLC. More management tools and alternative investment menus are being assembled which Fidelity no doubt believes will encourage investors to place more assets with Fidelity. In this process, smaller Registered Investment Advisers, those with assets under management of less than $20 million will be subject to certain fees. Fidelity will waive these fees once the higher asset management level is reached. If you know of investors who are considering improving the investment options available to them, please let them know that Broadview is seeking more clients and assets. The past guideline of a minimum of $300,000 in total account size is still in effect. Until the higher level of asset management that Fidelity is seeking is attained, Broadview would like to share a modest fee increase across its client base.