Monthly Commentaries

Looking beyond the numbers – December, 2008

What a relief to turn the page of a New Year and cast the disastrous financial performance of 2008 into the annals of history. While the global economy will remain moribund for some time yet, there are some encouraging signs that the eye of the storm is behind us. Firstly, governments and central banks around the world are committed to averting a wholesale banking collapse caused by excessive leverage and speculation that destroyed $10 trillion in wealth during the past year. The major clearing banks are swiftly being recapitalized - albeit at enormous cost - to restore investor confidence and to unwind the gridlock in lending that has precipitated a severe global economic slowdown. Banks need to be treated differently than other institutions because they are the cornerstone and the fulcrum of all commerce and finance, as well as the custodians of our savings and our confidence. Although many abused this trust, new operating rules are quickly being established to prevent any recurrence. There may still be some skeletons lurking both on and off bank balance sheets, but the process for dealing with them promptly and limiting the contagion has clearly been established.

Secondly, the cleansing effect of global de-leveraging has affected us all. Although noticeably poorer, we have been forced to abandon the legacy of entitlement that permeated our expectations. We can no longer rely on family, friends, financial institutions, or even governments to bail us out of our profligacy. Borrowing for consumption has evaporated and the leveraging of investments is now more prudently and carefully assessed. This heavy brake on spending will help to quickly rebuild savings until consumer confidence has gradually been restored. Meanwhile companies are also cutting back, pushing unemployment higher and forcing us to expand our education and ingenuity to create new opportunities. Nothing like a global financial crisis to wring out the excesses and impose a simpler, yet sounder set of values!

Finally, the collapse in commodity prices and the ensuing slowdown have significantly lowered our cost of living and erased any immediate inflationary concerns. Although the threat of deflation hovers, a vastly different psychology will prevent it taking root. An old guard desperately trying to cover up past mistakes characterized the Japanese experience of the early 1990's. We are now engaged in a generational transfer of power and responsibility that will unveil refreshing new ideas and approaches to resolving these and other global issues - where errors of the past are seen as a source of discovery for progress and improvement. Best wishes from all of us at Toron for health, happiness and success in 2009. Peter Sacks Managing Partner