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Thomas J. Feeney's Measure of Value offers periodic commentary on leading financial issues of the day. Additionally, we present occasional articles explaining the philosophical underpinnings of the investment approach that our firms have employed successfully since 1986. Our thinking frequently differs from the common wisdom of the investment industry. The investment approaches we employ always recognize this as a probability business, not a certainty business. In evaluating any investment action, we always weigh the potential damage should the market prove us wrong.

While we have great respect for investment history, we recognize that each era introduces unprecedented specifics. In all that we do, we attempt to identify value, in both a relative and absolute sense. History has demonstrated that long run investment performance leaders need not be the leaders in bull markets as long as they avoid giving up significant portions of their assets during bear markets.

We firmly believe that one need not be fully invested at all times. In fact, we far prefer to assume relatively large levels of risk when assets are historically cheap and to be heavily risk-averse when assets are historically expensive. This approach has proven successful for our clients over more than a quarter century.

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“China orders banks to keep lending to insolvent provincial projects.” That front page headline in the May 16-17 weekend edition of The Financial Times shines a spotlight on one of history’s most perilous financial conditions. Since the end of the 1990’s, we have been warning of the extreme danger posed by excessive debt. In this century’s first decade, the world suffered two painful recessions, and domestic stock markets twice declined by 50% or more.

According to former Fed Chairman Ben Bernanke and former Treasury Secretary Hank Paulson, the United States was headed into a depression following the Lehman Brothers bankruptcy, necessitating what has become the most massive financial rescue in history. In this country alone, the Federal Reserve has created about $3.5 trillion since 2008, in the absurd, but ironic, attempt to solve a problem precipitated by excessive debt by creating even more egregious levels of new debt. That effort has succeeded in levitating stock, bond and home prices, although the broader economy has made only meager progress. With no dire consequences so far attending the “money for nothing” approach, the central banks of Japan, Europe and China have decided to follow the U.S.’s lead in supplying unprecedented levels of monetary stimulus.

One need only reread the headline at the top of the page to view the logical extension of this misguided policy. The U.S. banking system has become expert at the “extend and pretend” approach to excessively indebted borrowers. The European Central Bank continues its ongoing charade with Greece over debts that will never ultimately be repaid. Now China has reached the point at which numerous local government projects can’t meet principal or interest deadlines. Again, the solution around the world is not to stop borrowing but rather to borrow more, ultimately creating a bigger problem but deferring the day of reckoning.

In February, the McKinsey Global Institute highlighted the dangers of the expanding world debt burden. Their report warns that the $200 trillion global debt, much of it recently accumulated, “poses new risks to financial stability and may undermine global economic growth.” Former Fed governor and close personal friend Martha Seger stopped by our offices recently, where she was once Mission’s first Vice Chairman. Martha confessed her concern that someday she’ll awake in the middle of the night, turn on financial TV and learn that the over-indebted world financial system has unraveled.

None of that seems to bother equity investors, who have bid prices in most of the world close to all-time highs. There is a remarkable complacency that central bankers have the situation under control. History disagrees. As Carmen Reinhart and Kenneth Rogoff point out in copious detail in This Time Is Different, debt levels even less onerous than today’s have been severely punished with regularity over many centuries. With central bankers building the debt edifice ever taller, investors are betting either that they’ll be able to time a prudent exit or that this time is truly different.


Tom Feeney is Chief Investment Officer for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more, you are invited to email your interest to Tom@missiontrust.com or call (520) 577-5559 to speak with one of the Portfolio Coordinators.

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