Q1 2011 Mid-Quarter Update — The Muddle Through World
Over the past three plus years a lot of things have gone wrong with the world economy. There has been a sub-prime mortgage crisis that ballooned into a full-blown financial and banking crisis and panic. There has been a deep, painful recession and a recovery lacking in vibrancy and job growth. There was a spike in oil prices and subsequent collapse. Let us also not forget a still simmering sovereign debt crisis in Europe and a crisis seemingly in waiting over the debt of U.S. states and perhaps the federal government itself.

As these problems have come and only partially been defused, financial markets have bounced back strongly, back to levels of the summer of 2008, before the crisis as a whole manifested itself in full fright.
As investors striving to know where things are going, it is well we ask how did markets recover and climb despite the litany of economic woes still plaguing us? Arrival Capital’s answer is a combination of the resiliency of the American economic system or, to be more precise, in the productivity and industriousness of American and world businessman, workers, entrepreneurs, and managers. Drilling down to its core, the world economy did not collapse because every day people get up and make things, create products others need or want, and the multiplication of these efforts a million or even billion times over kept the world going. Beyond the sheer industriousness of market participants, another reason for recovery is that long term trends such as the development and industrialization of heretofore underperforming and underdeveloped areas of the world, notably China, Brazil, India and others were slowed but not stopped. As soon as the world economy was stabilized, long term trends picked up again, and with these long term trends came growth in the demand for and a pick up in prices of many types of commodities, from energy and copper to silver and gold.

But despite the industriousness of people and the mega-trend of a developing world, things are still not quite right. The scope of imbalances, inequities, and distortions that caused the financial crisis and recession and have since been mutated and spit out by the crisis and its government sponsored remedies has simply been too great to allow things to return to normal. And so we are in what can be called the muddle through world. Things are getting better, companies are generating profits, the system has stabilized; and yet the unemployment rate is too high, inflation threatens, state and national finances are on the brink. Investors flinch at a hint of bad news, looking over our shoulders at a crisis still too close for comfort.

How to invest in such a muddle through world? Keep identifying the long term trends — developing world growth, the aging of the rich world, the emergence of riveting personal technologies — and invest in these trends through the best values you can find. Prepare not only for the worst, but for the not so great — such as 5% inflation, $100 oil, 9% unemployment. Finally, keep an eye on the tails, those less probable but still possible scenarios such as another dip into recession, hyper-inflation, sovereign debt defaults, and buy some insurance through high quality, dividend producing stocks, commodities, and inflation protected assets.

Arrival Capital aims to help our clients navigate this sea of economic uncertainty by looking forward and looking back, knowing where we have been and planning a course though the unknown times ahead to a brighter horizon that is out there somewhere.
- posted by Jay @ 3:48 PM