Gresham Partners:  Q2 2009 Market Review & Outlook

While some economists claim to see the beginnings of recovery in economic tea leaves, we believe we are in the midst of a long-term, systemic deleveraging that will take years to run its course. While the government necessarily focuses on stabilizing the banking system, the health of the U.S. consumer and the extent to which they deleverage their personal balance sheets will have a significant impact on the eventual course of the economic recovery.

In this regard, the news continues to be bleak as consumer credit recently contracted at a rate nearly 8 times greater than analysts’ expectations.
While the market reacted positively to the new Public-Private Investment Program and some are seeing signs of the banking system stabilizing and market volatility subsiding, we still face the question of whether these efforts will ultimately succeed. The scale of the existing programs already borders on surreal and the IMF now expects the eventual cost of credit losses to exceed $4 trillion, or nearly double the estimate of only several months ago.

Our growing fear is that consequences of these solutions may be as toxic as the assets they were designed to eliminate. Longer term, we continue to believe that a reordering of the global economic and political landscape is underway, and possibly accelerating, given the U.S.’s current problems and their potential cures. We remain concerned that the stimulus programs and their increased debt burdens will debase our currency, increasing the chance that the U.S. dollar will lose its place as the primary global reserve currency, and place at risk the global purchasing
power of our clients.

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