ESSAYS

Dear Friends and Investors— Back to Main


After memorializing 9/11, I understand the frustration with markets that do not reflect the value of our investments or our efforts over the last decade. To use a Biblical analogy, we seem stuck in “Wandering Years,” but I am confident better days lay ahead. I am pleased the Dow made it to 11,500 last week, just on financial strength alone. Apple, a top holding, is $400. Good companies still matter.

I was in New York for Labor Day, and the rising Freedom Tower is magnificent. The complex will be one of the largest attractions in the US. I mention it because we Americans have persevered, and we should be proud and confident in ourselves, our future, and the fundamentals of our investments.

Like the World Trade Center rebuilding, our Government embarked on an unprecedented response to the Financial Crisis with massive stimulus. It was the largest experiment in Keynesian economics ever. Our accounts hit all time highs this year after Wall Street and Main Street were reshaped. It was a huge success, no matter the recent Washington standoff over philosophical, economic and fiscal differences.

John Maynard Keynes (1883-1946) was a famous English economist who argued that governments must intervene to provide stimulus when free markets are in disarray, such as during the Great Depression when our Government did the opposite, and imposed austerity when the economy collapsed. Keynes set a theoretical standard for years, but his ideas lost policy influence during the Reagan/Clinton Bull Market Era when minimal Government involvement regained favor.

As an aside, Keynes was eventually a rich personal investor who notably refused to sell during market downturns. This is our policy too, and despite the volatility, out accounts are in aggregate doing fine and about unchanged for the year, which is far better than the performance of most mutual funds.

Free markets worked well, but after the Terror Attacks, and the Real Estate Bubble and Credit Collapse of 2008, our Government responded with intervention in nearly every area of our economy, culminating in massive financial stimulus, exactly as Keynes proposed, borrowing money the government did not have when the private sector refused to lend or invest, or hire new workers.

Despite the success of Keynesian Economics in the US, we have been buffeted by European financial disarray. The big European countries are defending their Euro with austerity pushed on their poorer counterparts contending with high unemployment. It is the opposite of what Keynes, a European economist, would have proposed. As an exclamation, our Treasury Secretary, Timothy Geithner, was insulted and rebuked by European officials at this weekend’s European Financial conference.

I do not think the value of the Euro will stand. The Euro is good for frugal, socially homogenous countries like Germany, but it is a poverty trap raising prices of goods in countries like Portugal where wages and wealth are low. I am not excusing the debt of Greece, who used the Euro like a piggy bank, but unable to start afresh, they are being coerced into austerity measures to avoid losses in European Bonds at big German and French banks who made leveraged bets that even Wall Street cannot make.

Italy, Spain, Portugal and Greece should walk away from the Euro. After reestablishing their credit, their economies will be attractive to new investors without the albatross of an overvalued Euro. Just last week China proposed fresh investment in Italy. Freedom from European Finance officials will restart growth for their people and I am confident this will also be better for our markets as well. I look forward to refreshed markets following the reappraisal of the Euro, an intractable common currency.

Matthew Shapiro, President MWS Capital                                                             September 18, 2011

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