Trillium News

Taking in Some Sail

At Trillium we’ve been taking in some sail (reducing equity exposure) over the past month.  We’ve done so because we’ve seen some clouds gathering on the horizon and feel a bit more ballast in the hold is in order.

The clouds we see have nothing to do with the so-called “flash crash” that happened for an hour or so back in May.  That was noise.  And the clouds are not primarily related to the debt problems in Europe (see Greece, etc.).  That is an aggravating factor, but not the main issue.

The main issue is that most of the leading indicators of global economic growth are now signaling a slowing pace of expansion ahead–in the US, in China and India, in Europe and Japan.  It was our anticipation of this that led us to take in some sail in January.  And we also wrote about it in our Economic Outlook in late April, saying that for differing reasons depending on the economy in question, it appeared the peak rate of economic expansion was (or would soon be) behind us.

It’s important to underline that a slowing pace of expansion DOES NOT mean a recession is at hand.  It just means the pace of expansion should slow going forward.  Historically such an environment tends to yield fairly tepid equity returns.  It does because once the pace of expansion slows, investors begin to question whether there is going to be a recession.  And this tends to dull their appetite for stocks a bit until the question is settled.

Such a transition to a less enthusiastic investing climate is to be expected at this more mature stage of the business cycle.  What complicates the picture today is the unprecedented level of government involvement in the global economy and markets.

Beginning in late 2008 governments around the globe unleashed a tsunami of stimulus measures intended to prop up the global economy.  During 2010 the effects of those measures will peak and wane.  Given the unprecedented nature of this intervention, it’s hard to predict, for example, how the US economy will fare once the stimulus wears off.  We seriously doubt it will sink back into recession, but growth could be subpar.  We have to wait and see.

Further limiting visibility are the European debt troubles that have lately caused such turmoil in Greece.  The austerity measures required for Greece, Spain and other countries to dig themselves out from under their debt burdens will certainly slow economic growth in Europe.  As Europe is a trading partner with all other parts of the world, these troubles will act as a drag on global growth.  Add in the idea that a country like Greece could default on its debt and you have a recipe for nervous investors.

In light of these unusual governmental risk factors, we’re placing an even higher premium than usual on preservation of capital.  This is why we’ve taken in some sail (stocks) and added to our ballast (cash and bonds).

We’re the first to admit we may be wrong and the stock market could surge ahead after the recent (overdue) pause.  Should that happen, we’ll consider it under the heading of “good problems to have.”  If not and the seas get a little rough, then we’ll all appreciate sitting a bit steadier in the water and clipping a few more interest payment coupons along the way.  Stay tuned.

Download the 1st Quarter 2010 Market Commentary