Essay About Investment Policy Commentary And Chief Investment Officer

Investment Policy Commentary
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By Jay Willoughby, CFA, Chief Investment Officer, MLIM Private Investors and Ronald Welburn, CFA, Investment Strategist
www.mlim.ml.com
Investment Policy Commentary
OCTOBER 2005
Private Investors
MANAGED ACCOUNTS
Some general observations
Alan Greenspan, Chairman of the Federal Reserve Board,
will be retiring in January 2006 after 18 years on the job.
The general consensus, at least in the financial community,
is that he has done a good job of controlling inflation and
keeping the economy from undergoing a serious recession.
He came to the office at a difficult time, after the stock market
crash of 1987, and there was great concern that the economy
would suffer accordingly. However, he maintained sufficient
liquidity and a period of prosperity followed. There was a
minor recession in 1990 related to the first Gulf War and
again in 2001 when capital spending and corporate profits
took quite a tumble (although consumption did not experience
a down quarter). Overall, Chairman Greenspan deserves a
lot of credit for maintaining a long period of prosperity with
no major interruptions. The financial markets recognized
this prosperity in that a major bull market which began in
1982 continued after the crash of 1987 and went on with a
strong uptrend until March 2000. Since October 2002, the
equity markets have again responded positively to stronger
economic growth helped by a combination of tax cuts and
accommodative monetary policy. The bond market has also
performed well during Chairman Greenspan’s tenure with
the 10-year Treasury bond falling from 9.5% just prior to
the 1987 crash to 4.3% currently.
Chairman Greenspan has always expressed a strong belief
in free markets and the fact that prices reflect the push and
pull of demand and supply. For example, he has expressed a
belief that gold prices will signal when inflation is getting
out of control. If he has erred, it has perhaps been because
of the difficulty of dealing with the time lags of monetary
policy on real economic activity. Nevertheless, when mistakes
have been made his reliance on price signals have quickly
corrected the mistakes. A recent mistake was perhaps keeping
interest rates at 1% for too long in the belief that deflation
was a major concern in the 2003 and 2004 period. There
were a number of economists who were afraid that the United
States was about to repeat the deflationary experience of Japan
after 1989. This accommodative monetary policy contributed
to what many believe is a bubble in the housing markets,
as well as