On the Allocators

                    5 February 2014

Periwinkle,

          Well, since the last writing, not much has changed in Missoula. Tonight it is perhaps four or five degrees below zero. We had a brief warming spell and then back into the plunge. The whitetail deer in the back yard have begun to minimize their activity as nature dictates them to do that they may survive. This is also evident with the song birds, as I’ve noticed their staying in the two thick blue spruce trees out front along the driveway or in the potentilla rows in the backyard, which seem naked without their yellow and white flowers and small green leaves, evidently still providing enough cover for the birds to have a safe harbor from the cutting wind. The birds are not feeding much from the feeder which hangs from a black metal pole on the deck. This has a tendency to blow occasionally back and forth with the strong winds we get gusting up from the Bitterroot to the south and the surrounding countryside, which as you know, is quite open with ponderosas and firs above the neighbor’s ranch. I imagine at some point we may see open space in the higher surrounding area, one never knows. The elk have not yet come out on the hillsides as they typically begin to do this time of year and into the spring. I came once again up to the house today during lunch and threw the bumper for the lab in the back yard. I watched the birds cautiously fly in and out of the shrubs as the dog bound through, hunting for a white bumper hidden somewhere after having landed in the distance in the snow. The aspen look cold, their white bark blending in with the surrounding bitter elements. I’ve noticed the lab’s lower chin is beginning to turn white and grey. Always a telling sign for dogs. This one is so smart and the children love her. She will be among two others at some point which are still on my office window sill, ashes in containers awaiting being spread in the surrounding wilderness and rivers within which we shared so much life together hunting, fishing and generally enjoying what nature has to offer.
        I must say, Periwinkle, I did get a charge out of your reply to the last bit of my recent letter. You are, of course, quite correct to ask, “Is it not generally the case that investment is made with some foresight as to a time horizon not dictated by interim ebbs and flows, or speculators’ emotions?” This would be a common man’s take certainly, which would include our own. Successful employment of capital (plants, equipment, technology, human, so forth) generally involves a tad of planning and say five or ten years of incubation prior to bearing eventual fruit. Therefore, most executives, their boards or, let’s say, “company expansion committees” are unlikely to say, “Oh my, look what the Federal Reserve is doing now, cutting back on their bond purchases at last. Time to pull out of Poland, Argentina, Columbia, Chile, Brazil, Russia, South Africa, Turkey, Thailand, Vietnam, Indonesia, Malaysia, or, say, Timbuktu!” This is not how most private enterprises, thank goodness, function. It sounds a touch, to borrow one of Mr. Reagan’s favorite words, like “bureaucratic” knee jerking in “certain circles.” Well, not exactly, but maybe. There are, you see, planners out there.
        I alluded to many of the “investment characters” in the the last letter. I would not place these folks in the planning camp for they, you understand, are different operators. As money sits idle, not being lent, it eventually finds places to roam, such as into the securities of foreign issuers which flows are bound to do if rates of return in their own state are deemed sub par. Sub par is in the eye of the beholder, of course. This can and may be being magnified with borrowing on the cheap as well. At any rate, it does appear some entities are pulling in their horns and shaking things up a bit with the talking heads placing this squarely on the latest tightening (if one can call slowing bond purchases tightening) slant of the central bank of this country. If this is accurate, then I’d state that it is in part a healthy matter, clipping things prior to their getting out of hand again. So, perhaps the folks are looking down the road say six months to a year and seeing rates in this country heading higher? Perhaps seeing that there will not be the “global powder” to pick up what the central bank is no longer purchasing. I’m not sure, but that’s one angle, Periwinkle. This would be detrimental to our present deficit financing arrangement, of course. One, as you know, should never follow the crowd or go with the herd as this is how one gets trampled. Recent earnings and certain economic stats are dictating things remain fragile.
        Each “emerging economy” is unique; however, “when the birds come off the wire they usually all do so together,” as a now deceased friend used to glean. Some of the states’ have spent too much, others have perhaps been caught borrowing too much as well, others have relied too heavily on their commodity exports, not transitioning yet to the borrow and spend consumer model we employ, and others have simply been poor allocators of resources given their planned apparatus. Planners, you see, have never been efficient allocators of resources. I realize I’m telling Noah about the flood, here, as you are a follower of basic economic principles. Two things loom large going forward. One, that the path of our bankers should not be dictated by anything other than inflation, for you realize that I am not a fan of attempting to utilize monetary policy to improve or influence employment. This is the fiscal realm. If the goal remains keeping inflation at bay, then hopefully our policy makers will stick to their “tapering,” looking forward with an eye towards the “what ifs?” Too, that the global trade story will continue as the world’s future customers see their economies once again bounce back from the present minor currency shocks. After all, demographics, balance sheets and obligations are in a sense healthier in the lesser developed economies than the “developed.”
        Periwinkle, I continue to wish our greenbacks were backed by some sort of a basket of goods/commodities. Convertible into some globally accepted medium. Otherwise, I do not see how to curtail the fiasco staring us in the face. The next letter, I should probably move away from this front and recenter on simple matters, like, once again, austerity. That way you will once again, in good cheer, write back. Until the next epistle, Farewell.

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