INSIGHTS

On January 03, 2013

The Strategic Times: The 2012 Annual Review and our Best Ideas for 2013

We view the next phase of the markets move as one of sequencing. We have often referenced
our outlook to that of Wayne Gretzky’s unique ability to be in the right place. It has
been said that he always was looking to skate to where the puck was going and not
where it is at. We often find many economic and market calls simply taking the current
conditions and extrapolating them for future outcomes. If this were to work, the most
accurate outcomes would be dominated by the engineering field.

Perhaps the best ways of detailing our sequencing argument is the game of chess. The
best players think several moves ahead. However, to be successful, they don’t move
their pieces out of order. Rather, there is the sequencing of the moves that determine
their success. After the deleveraging and rebuilding of balance sheets and continued
accommodation of the Federal Reserve (Fed), the next phase is asset inflation. This will
be driven by the immense amount liquidity that not only remains at historic levels, but is
increasing. We see several forecasters moving on to the impacts of the Fed several
years down the road and missing out on the events that have large impacts on portfolios
and consequently, their returns. In fact, the markets primary concern is not inflation, deflation
or stagflation, but rather dehydration. Consider the immense amount of liquidity in
the marketplace:

• Households hold over $8.0 trillion in deposits and cash equivalents
• Commercial banks hold $1.807 trillion in cash
• Global currency reserves total $10.478 trillion
• As for corporate balance sheets, according to H. Silverblatt, Senior Indices
  Analyst at S&P Dow Jones Indices, cash on the S&P 500 balance sheet is
  almost 10% of market capitalization and an estimated 130% of 2013 operating
  earnings.

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