Bill and I attended Schwab’s Impact Conference in Boston last week where we had the chance to speak with and listen to some of the best investment professionals in the country. Over 1,700 Registered Investment Advisors and 1,300 vendors were in attendance. We would like to share our observations and thoughts.

We spoke with Rick Reider, CIO of Fixed Income for Blackrock about the Federal Reserve and its need to do everything in its power to avert a longer term secular decline in the economy (much like Japan).

• His thoughts were that the Fed will continue with large amounts of QE 2 (Quantitative Easing) and that rates will remain low for a period of time
• With QE2, the Fed plans to buy $600b (or more) of treasuries and long term securities
• We applaud the Fed for doing everything possible to stimulate the economy even though we feel like there are no silver bullets

Hank Paulson (Former Secretary of the Treasury)

• Mr. Paulson’s interview with Liz Ann Sonders was a bit dry but nonetheless he provided fascinating insights regarding the events in 2008.
• “The bubble burst and we all missed it” stated Paulson.
• He went on to elaborate that since WWII residential housing has generally increased in value. There were no mathematical models that predicted the sharp decline in housing prices. He tried to reform FNMA and Freddie Mac but “people in Washington don’t compromise and they get locked into their position.”

Biggest Lessons from Hank Paulson

• Need for more systemic risk regulation (there was no entity regulating the holding company of AIG before the crisis)
• Big institutions (banks and insurance companies) still have not learned that liquidity is key to survival in perilous times
• The TARP prevented “economic Armageddon” and we are much better off from an economic standpoint with TARP.
• 93% of Americans are against TARP but only 60% of Americans are against torture. (This drew a big laugh from the audience.)

Present Day

• Paulson was encouraged that the Financial Stability Oversight Council had been formed as part of the Dodd-Frank law. He was pleased that the Council will have “wind down authority” which will protect the financial system from systematic risk.
• He believes that the US is much better off now and will have greater long term growth due to the events of 2008.

Thoughts from Greg Valliere

• No Medicine Left for Fed Policy: Valliere believes that there is no shock and awe left and there is not much more that the Fed can do. He commented that Congress will not authorize any more stimulus. “Spending is radioactive in Washington currently.”
• Election: He is positive on the markets and correctly predicted the Democrats would have a big defeat. Valliere believes the defeat will provide a power shift toward gridlock. This shift will be favorable to the markets and will take uncertainty off the table.
• Taxes are the Biggest Issue: Valliere believes tax cuts will be extended for the following reasons:
• Very bad time to raise taxes which will cut into GDP growth
• From a political perspective, the moderate Democrats look vulnerable in 2012 and will therefore want to extend tax cuts. The tax cuts may be extended for 2-3 years.
• The Estate Tax rate will probably be around 45% with an exclusion amount of $3-$4 million and this will not be retroactive to 2010.
• Worries: He talked about the red-ink deficit, the Fundamental Radical Islam movement with 100 nuclear bombs in Pakistan, the war in Afghanistan which has very little support, and the threat of Israel attacking Iran.

Economic Trends

• Deleveraging will limit the growth in the US and Europe while the growth in the emerging markets is positive.
• There could be a worldwide food crisis.
• Inflation will rise as Bernanke has stated that inflation is too low.

Mario Gambelli and Team: Stocks in a Turbulent World

• Gambelli and his team from GAMECO believe that cash has no value and that bonds are in the 9th inning of a 30 year bull market.
• Stocks are undervalued with the 50% P/E contraction and 12x forward earnings.
• Global companies that are paid in many currencies are interesting.
• The third year of a presidential cycle is usually a strong year for the stock market with average returns of 17%.

We would be delighted to talk with you about the ideas shared at Impact or about our thoughts on the markets. We appreciate the opportunity to serve you.

Don Olmstead, CFP®
Managing Director