A portfolio manager's perspective on Fed critiques

As we have explained several times in various posts (such as the first one on this blog), our investment philosophy is based upon the long-term health of successful businesses (choosing good companies), rather than upon the shaky foundation of attempting to time market cycles or predict fluctuations of currencies, commodities, or interest rates -- including those controlled by the Fed.

The current market volatility has been widely blamed on recent decisions by the Fed and disagreement by market participants as to what the Fed should actually have done or not done.

Are they right? What should the Fed do? There are excellent economists whose works we have read for years who are at complete disagreement over the proper course of action. In fact, any position you can name right now will generate heated opposition on this subject.

However, although many in the media are pointing (as they have for several years now) to the specter of the 1970s and "stagflation" (a stagnating economy coupled with rising inflation), it is safe to say that whatever actually develops will not be the same thing that the conventional wisdom expects. In fact, an honest comparison of the fundamental economic scenario of the 1970s and the economy that we have today can lead us to conclude that whatever does develop, the 1970s are not it.

We would also argue that, as we have stated in previous posts such as this one from over a month ago, what is really troubling the markets may not have as much to do with the threat of inflation as it does with the threat of taxation. Although not everyone who participates in the market understands the ins and outs of monetary theory and what does and does not cause inflation, everyone understands that when taxes go up you have less money left. Taxes are pretty clear about what they will do to your returns. They give you an exact number of what they will take, unlike inflation which economists can debate all day long.

That said, we do not dismiss inflation's damaging potential by any means, and in a fiat-money system (currency not tied to an objective store of value), inflation is almost always present to some degree. We believe this is yet another argument for ownership of businesses.

All this is why we believe that the best investment philosophy is one that focuses on selecting sound businesses with management teams who are able to navigate through unpredictable fluctuations, whether those are caused by the banking system or by other factors.

For later blog posts dealing with this same subject, see also:


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