outlook 2012

Outlook 2012The Triumph of the Small

Douglas Tengdin, CFACharter Trust Company

Small is the New New

•Small is Beautiful•Small Futures•Small Steps•Small Gardening•Small Engine Repair

Small approaches and small solutions will dominate the landscape

•Politics•Economics•Markets

Small political outcomes

•No charismatic leader from the Republicans

•No “grand-compromise” from the Democrats

•The National election will be fought on a state-by-state, voter-by-voter basis.

Republican Candidates

•Cain 26%•Romney 24%•Perry 10%•Gingrich 9%•Paul 8%•Bachman 4%•Santorum 2%•Huntsman 1% •Johnson >1%

Presidential approval rating:

Congressional approval rating:

Results in 2008 and 2012?

In such an environment, big proposals suffer the death of a thousand cuts:

•Flat taxes•Medicare / Medicaid Reform•Social security reform•National Security reform

Small economic outcomes will predominate•Slow economic growth in the US•Small steps towards fiscal union in

Europe•Global growth will come from

▫Emerging Economies▫Frontier Economies

Slow Economic Growth

•Employment since 1970:

Source: Bloomberg

Recently:

•Employment since 2004:

Slow Economic Growth--Causes•Deleveraging

Savings Rate

Source: Bloomberg

Slow Economic Growth—Ongoing issues

New Home Sales – 1970 to 2011

Source: Bloomberg

Small market solutions will be preferred•Small cap stocks should outperform•Small nations will do better

internationally

Small Cap Stocks:

•Have only outperformed 5 of the last 20 years.

•Tend to be domestically oriented•Have been disproportionately assisted by

mobile technology and ubiquitous broadband▫Peter Lynch: Focus on users of technology

•Will be aided by an easing of credit conditions.

Stock Market PerformanceSource:Bloomberg

L/C M/C S/C1992 7.59% 9.50% 19.38%1993 10.04% 13.90% 17.59%1994 1.32% -3.60% -4.79%1995 37.66% 31.02% 30.03%1996 22.74% 19.04% 21.11%1997 33.35% 32.24% 25.58%1998 28.58% 19.09% -1.32%1999 21.04% 14.70% 12.41%2000 -9.13% 17.56% 11.85%2001 11.82% -0.59% 6.51%2002 -22.49% -14.68% -15.21%2003 28.99% 35.94% 38.49%2004 11.24% 15.72% 21.29%2005 5.30% 13.26% 8.33%2006 15.23% 9.70% 14.29%2007 5.46% 7.93% -0.29%2008 -36.92% -36.15% -31.00%2009 26.47% 37.38% 25.57%2010 15.06% 26.64% 26.31%2011 1.57% -1.28% -1.03%

Small nations:

•Smaller, more diverse financial sectors•Smaller infrastructure projects

▫Less funding needs▫Less opportunity for corruption

•Less headline risk

Small nations:

•Singapore versus China

Small nations

•Switzerland versus Germany

Small nations

•Chile versus Brazil

Small returns means modestly positive results

•7% Stock Market Returns•2% Bond Market Returns•0% Cash Returns

What will make things go big?

•Growth, led by the US, picks up▫A housing initiative by the Administration▫Spending and tax reform by Congress▫Continued stability in the banks.

•Europe blows up▫Greece rejects the bailout and leaves the

Euro▫Financial contagion results, a major

recession hits Europe•A Geopolitical event in Asia

F.A. Hayek:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”