The world is beginning to end at a decreasing rate. It is still ending, but the rate at which it is ending appears to be slowing -which passes for good news on Wall Street.

Impressive federal stimulus spending and dramatic interest rate spreads are coaxing the banks back into lending. While credit is still not easy, those with good credit can now borrow again -and that is a big deal. The overnight repo market (interbank lending) is functioning again, meaning that, if nothing else, the U.S. banking system has taken a step back from the brink of imminent disaster. Hopefully, we can now get back to the business of managing a slow, painful global recession.

Inflation or Deflation?

With all of the stimulus funds hitting the economy it’s easy to hit the inflation-expectation panic button. But even if these policies create long-term inflation, what about right now?

In the near-term, prices will almost certainly go down. It’s hard to imagine that the prices of energy, housing, or food could bounce back from their broad-based decline much before the end of summer. Furthermore, it’s hard for us to see domestic unemployment rates improving until at least the end of the year. There are still more layoffs to come.

Retail sales, commercial real estate, and food prices have probably not seen their ultimate lows. We expect that 2009 will be a net deflationary year, but that prices will start to go up again by late 2009 or early 2010.

Of course, we may prove wrong, but the odds seem to be in our favor.

How to Invest in this Horrible Climate

There are many signs that the worst is over. It is doubtful that there will be any more world-class failures on the scale of Lehman or AIG. On the other hand, we can still expect waves of layoffs and more forced asset sales, especially in commercial real estate.

We maintain our position that patient investors can still make money by focusing on quality, valuation, and yield. The best investors will find ways to capture all three.

As long-term growth investors we demand to be “paid to wait” as the markets recover over time.

We may see the current rally continue or lose its steam quickly, but over the next year at least, the theme will be volatility. We’re going to be on a roller coaster for awhile.

Big Plans in the Works...

First we started the Long Term Opportunity Fund to capture misunderstood opportunities in small public shares. Next we started the Income and Growth Fund to provide current income for investors with some inflation protection. We “registered” the firm with the SEC to allow us to manage a wider array of strategies and to reach out much more broadly to make our service offerings known to the public. Stay tuned! There’s a lot going on here!

Yours, Eric Wanger, JD, CFA