by Ron Muhlenkamp   

In 2009, we had a good year.

We identified the end of the forced selling in the spring and put our cash to work, allowing us to participate nicely in the rebound that has since occurred. No, we've not recouped the declines in price of the prior two years, but it's a good start.

In 2001, we argued that the recession at that time was "a normal, cyclical recession" that the U.S. went into, and would come out of, in normal fashion. We do not believe that to be true at this time. A number of the differences are discussed in the "Questions and Responses" article which begins on page two of this 'Memorandum; (the "Q&R" took place at our November 5 seminar). A brief recap follows:

Some of the items that occurred during this recession, and our responses to them, will have far-reaching effects. Specifically, the public witnessed declines in price in both their homes and their investment portfolios. As a result, many appear to have changed their habits of saving versus spending. Business enterprise witnessed a fall-off in orders in the fourth quarter of 2008 that was unprecedented in size and rapidity, resulting in record low levels of capacity utilization. The credit markets seized up. The velocity of money (turnover) collapsed.

In response, the U.S. Treasury and the Federal Reserve took unprecedented steps to support the credit markets. This appears to have worked. Funds that were provided on an emerging basis, e.g. TARP, (Troubled Asset Relief Program) are being paid back with interest. At the same time, the U.S. government spent -- and is spending -- huge amounts of money on various stimulus programs with no prospect of recouping the funds except through taxes. Further, the U.S. government is increasing the mandates (healthcare) and regulations on business enterprise, increasing the cost of hiring people and doing business.

We are now embarking on the second great economic experiment of my adult lifetime. At the most basic level, I believe that prosperity and economic growth result from the incentives that some people (employees) see in being gainfully employed, and that other people (employers) see in employing them. After the stagflation (inflation and slow economic growth) of the 1970s, Paul Volcker and Ronald Reagan used monetary and tax policy to encourage individuals to hire other individuals. In farmer terms, they fed the goose that lays the golden eggs. After 1980, we enjoyed a generation of growth and prosperity. My fear is that current policies, while designed to provide incentives to employees, will also penalize employers and may result in strangling the goose.

Our challenge as investors is to find companies which can thrive despite these penalties. We're finding some, but until the additional rules, regulations, and taxes are defined, consumer and business confidence (and ours) is likely to remain subdued.

-- Ron Muhlenkamp

 

The comments made by Ron Muhlenkamp in this article are his opinion and are not intended to be investment advice or a forecast of future events. Copies of past newsletters are available at www.muhlenkamp.com.