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The Long (Slow) Rebuilding Phase


August 1, 2010 Q2 2010 Commentary from Andorra

"The Long (Slow) Rebuilding Phase"

The U.S. economy has entered, and still continues in an anemic recovery phase. Some indicators such as manufacturing and private sector employment are starting to show signs of life in the last few months but, on the balance

Employment and housing are often considered keys to any economic recovery and these metrics have been languishing for months. The good news: these indicators and others have leveled off are not continuing to trend down as they were during most of last year. This is hopefully much needed confirmation that some semblance of a base is being established in the U.S. economy.

The economy like financial markets can be prone to panics and manias, and many employers post-financial crisis quickly reduced workforces to "right-size" employment levels in an effort to weather the coming storm. This is where one of the major problems currently facing us lies, growing employment back to pre-crisis levels. Long-term, hopefully employers don’t become accustomed to doing the same (production and business output) with fewer workers on their payrolls. This would be another structural problem to overcome in addition to a U.S workforce that is facing the continuing specter of outsourcing to other low-cost markets overseas.

strong recovery signs seem few and far between.

Economic Outlook

To foster a growing economy hiring levels need to return to much higher levels than are currently being exhibited in the marketplace. Estimates vary, but approximately 125,000

To return to a level of unemployment many consider healthy at around 5%, the economy would need to create

The U.S. savings rate has swung solidly back into positive territory post financial crisis. "Negative savings" began in April 2005 and was noted by many as an ominous sign predicting problems on the horizon for the U.S. economy. It is easy to now look back and say AH HA! yes that was a telling sign that we were headed for trouble. But, it can now be noted that the savings rate is now positive with consumers rebuilding their personal finances and paying down debts. Long-term this will be

jobs need to be created each month to keep the unemployment level static (currently unemployment is running almost 10%, 12%-13% in California). Estimates of anywhere from 7-8 million jobs have been lost since 2007 with many economists stating unemployment levels have not been this high in 26 years. The job market is definitely not functioning well and unemployment has been characterized as "persistently high" versus past levels. at least 200,000 private sector jobs each and every month for many years to substantially reduce current unemployment levels. Going forward, whether or not this is possible or will happen is debatable but we feel it confirms that we as a nation are in for a very long recovery process. Months ago many market pundits blindly predicted a "v-shaped recover" and that we would quickly snap out of the current slowdown. It now seems that these "experts" were basing their analysis on the old "we’ve seen this before" and "this is what usually happens" after a significant downturn in the economy. But, it is different this time as this is an asset bubble of epic proportions. It will take time to realign public and private debt to rational levels and the consumer has a long rebuilding phase which is not yet finished. a substantial net positive for the economy but in the short to intermediate term this means that dollars are not being spent. The consumer accounts for over 70% of the U.S. economy and spending levels will likely stay at moderate levels until confidence returns that employees will stay employed (a fear of being laid-off is a powerful savings motivator) and newly re-hired employees have money to pump back into the economy.

Clearly, putting America back to work is going to take years. Some have suggested (and others with strongly argue) we may have entered a period of "structurally high unemployment". Government officials have recently begun to focus on the "real economy" and not Wall Street bailouts. This will be a net positive if government can foster real incentives for companies to hire workers and banks to begin lending again. On the balance credit is still tight and companies are looking for signs of a growing economy to feel comfortable and start hiring again. This is the old "chicken or the egg" argument and hopefully someone can step in and end the standoff. A mechanism to move banks to offload their record amounts of cash from their balance sheets would be a good start but finding sound places to lend and put the money to work will be a problem.


Where does that leave us? Deferring to PIMCO and their "new normal" thesis it does seem that we are in for a drawn out recovery phase. Hopefully the dreaded threat of a "double dip" recession has passed but many fear we are not yet out of the woods. In short, the US economy from an investment perspective seems quite a gamble

The debt crisis that hit many members of the European Union is a reminder that a new crisis may be just around the corner and now is the time to realign portfolio holdings. Developed Euro Zone economies and the U.S. will be dealing with high debt levels and low growth rates for decades due to the explosion of sovereign debt. Going forward, be proactive with adding emerging and international market holdings that are not overleveraged and this will pay big dividends in the future.


Kurt Stabel

versus other alternatives. On almost every point it appears that it would be less risky for investors to venture overseas to economies that are not overleveraged and growing at much faster rates versus the U.S. economy. As emphasized in last quarter’s newsletter look to diversify away from U.S. assets, if in accordance with risk tolerance or after a run-up and move into higher yielding assets abroad.

Dear Friends and Clients:


Disclosure: domestic and international debt and equity ETF and Mutual Funds