The Power of Zero (interest rates)

Posted by Donald Coxe of Harris Investment Mgmt for the Bank of Montreal

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So what was all that Depression fuss about?

Ed Note: One of Michael Campbell’s favorites, Donald Coxe has 35 years of institutional investing and money management experience in the United States and Canada, and a unique background in North American and global capital markets.


The Power of Zero

The US economy grew 3.5% in the Third Quarter, and all the major economic numbers now being reported suggest this one will be even stronger. Stock prices are soaring.

In case, you’ve forgotten:

Sixteen months ago we were heading into the Midnight Massacre, when Messrs. Bernanke and Paulson launched the rescue of Fannie, Freddie and Wall Street.

That swiftly evolved into the Age of Bailouts, with Congress enlisted in emergency funding for Wall Street’s biggest, boldest and brashest bankers on a scale that made IMF rescues of entire nations look like chump change. Only Lehman was allowed to experience the Schumpeteresque-slaughter reserved for capitalist cupidity and stupidity. Operating with scripts and strategies conceived on the fly, varying prescriptions of emergency assistance were extended, under panic conditions, to Citigroup, Merrill Lynch, Morgan Stanley, AIG and Goldman Sachs.

Since then, the Obama Administration and the Pelosi-led Congress have been moving to take charge of some of the commanding heights and strategic valleys of the US economy. Highlights: takeovers of General Motors and Chrysler, a defi cit of 12% of GDP, $790 billion in handouts and assistance under the rubric of economic stimulus, a costly new national health care system, and a vast array of tax and trade global warming programs whose tentacles will reach into almost every sector of the economy.

To date, his rescue operations are succeeding. As Joe Biden put it, “A year ago we were talking about falling into Depression. Now we’re talking about the shape of the recovery.”

But deeply-wounded investors should be cautious about throwing caution to the winds. Among the signs that the stimulus package didn’t repair the potholed yellow brick road to prosperity is the upside breakout in the Bad News Asset: Gold.

This month, we begin our analysis by discussing the anniversaries of the births of two new eras. First, the Age of Global Capitalism, which began 20 years ago with the Fall of the Wall. Second, the apparent ending of that era a year ago with the return of Big Government as Economy Manager with the election of Barack Obama. We weren’t sure then how he was going to deliver everything his thrilled backers wanted, but we knew that he wanted to be a transformative President and he cited Reagan as such a leader—even though he said Reagan had the wrong views.

With that background, we search for an appropriate investment strategy for tumultuous times. While the talk is of trillions in stimulus, foreclosures, bailouts and defi cits, we have decided to focus on a humble number— Zero—which is roughly the rate on government short-term funds, high-grade money market funds and inflation across the US, Canada, Japan, and most of Europe.

We are leaving our cautious Asset Mix unchanged. Risk assets—other than US real estate prices—are bubbling upward everywhere, but the big banks’ balance sheets remain overloaded with the unmarketable unmentionables, and US regional banks—the backbone of the real economy—are now being engulfed by their exposure to commercial real estate and consumer loans as unemployment continues to climb.


Published by Coxe Advisors LLC
Distributed by BMO Capital Markets


Basic Points
A monthly publication of opinions, estimates and projections prepared by Donald Coxe of Harris Investment Management, Inc. (HIM) and BMO Harris Investment Management Inc. (BMO HIMI). Basic Points is available exclusively to clients of BMO Nesbitt Burns, BMO Harris Private Banking (Canada), Harris Private Bank (U.S.) and BMO Capital Markets.

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