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Outlook 2012The Triumph of the Small
Douglas Tengdin, CFACharter Trust Company
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Small is the New New
•Small is Beautiful•Small Futures•Small Steps•Small Gardening•Small Engine Repair
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Small approaches and small solutions will dominate the landscape
•Politics•Economics•Markets
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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.
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Republican Candidates
•Cain 26%•Romney 24%•Perry 10%•Gingrich 9%•Paul 8%•Bachman 4%•Santorum 2%•Huntsman 1% •Johnson >1%
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Presidential approval rating:
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Congressional approval rating:
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Results in 2008 and 2012?
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In such an environment, big proposals suffer the death of a thousand cuts:
•Flat taxes•Medicare / Medicaid Reform•Social security reform•National Security reform
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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
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Slow Economic Growth
•Employment since 1970:
Source: Bloomberg
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Recently:
•Employment since 2004:
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Slow Economic Growth--Causes•Deleveraging
Savings Rate
Source: Bloomberg
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Slow Economic Growth—Ongoing issues
New Home Sales – 1970 to 2011
Source: Bloomberg
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Small market solutions will be preferred•Small cap stocks should outperform•Small nations will do better
internationally
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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.
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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%
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Small nations:
•Smaller, more diverse financial sectors•Smaller infrastructure projects
▫Less funding needs▫Less opportunity for corruption
•Less headline risk
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Small nations:
•Singapore versus China
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Small nations
•Switzerland versus Germany
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Small nations
•Chile versus Brazil
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Small returns means modestly positive results
•7% Stock Market Returns•2% Bond Market Returns•0% Cash Returns
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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
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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.”