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But this is only a temporary phase of

maladjustment. All this means in the long run that
August 5, 2009 mankind is solving its economic problem. I would
predict that the standard of life in progressive
Horse Latitudes countries one hundred years hence will be
between four and eight times as high as it is
When the still sea conspires an armor to-day. There would be nothing surprising in this
And her sullen and aborted even in the light of our present knowledge. It
Currents breed tiny monsters, would not be foolish to contemplate the
True sailing is dead. possibility of a far greater progress still.
The Doors, Horse Latitudes (1967) John Maynard Keynes, Economic
Possibilities for our Grandchildren (1930)
The Horse Latitudes are sub-tropical high pressure
zones where sailors to the New World would find Each day our focus is on your portfolio. Where are
themselves becalmed, sometimes for weeks on end. the risks? Where are the opportunities? A constant
As the stocks of fresh water dwindled, livestock went challenge is to avoid getting consumed by the tiny
over the rail. monsters in each day’s news feed.

What’s that got to do with investing Frank? Security Ultimately, returns are determined by avoiding severe
selection must allow for the climate. A return to losses, participating in the profits of companies
broad-based economic growth is not a foregone owned, collecting interest, and capturing gains
conclusion. If indeed we have reached the Horse through buying cheap and selling dear. To these
Latitudes, portfolios should be so positioned ends we have been investing along several themes
which, so far, have been meeting our expectations.
A useful way to consider the hyperbolic expansion of
credit over the past decades is to treat it as demand Our commitment to Treasury Bonds is new, as we
brought forward. Buy the Frigidaire today, on time, sought to deploy the proceeds of a successful foray
rather than saving up. into High Yield and Convertible Bonds. Bernard
Baruch said he made his money by selling too soon.
Junk credit is an excellent place to honor that maxim.
In 1981 the total outstanding private debt was
somewhere around $4.5 trillion. Today it is
somewhere around $53 trillion. That's about $50 Bonds
trillion of GDP that got added to the system over
a period of about 30 years, all of which was
"false" GDP - that is, pulled-forward demand.
First, what are we doing with Treasury Bonds? By far
Karl Denninger - Market Ticker our most contrarian position is in the Long Bond.
Investments in Treasury securities are motivated by
inflationary expectations. If fixed income investors
As we set to work off this debt, an opposite dynamic
believe inflation is headed lower, they will invest in
sets in. The resultant frugality will yield lower than
long-dated securities.
normal standards of living. We’ll nurse along the old
Fridge ‘til the Visa’s paid off.
Everyone knows the government is printing money
like crazy, and inflation is right around the corner. Or
Of course, not all that $50 Trillion went to productive is it? Among the lessons investors learn, a useful one
ends. Within 18 months Karen Weaver of Deutsche is that when a consensus is overwhelming, be
bank projects that 48% of total mortgage borrowers advised to explore the other side of the trade
will have negative equity. Add to this the Banking
system’s ongoing multi-trillion dollar vaporization of Bear markets in Treasuries do not occur until two
capital, and we may expect a meaningful and things happen — and these two things are highly
lasting reduction in the contribution of credit to the correlated: (i) the unemployment rate begins a
American economy. descent from its peak, and (ii) the Fed signals its
intent to tighten monetary policy.
Dave Rosenberg, Gluskin Sheff
So even with a rebound in employment, of which we
see no evidence, prosperity as we’ve known it may We are nowhere near a recovery in employment,
not be just around the corner. and the Fed has no reason to choke off an expansion
with higher rates. There is no expansion.
While Wall Street is convinced the recession is
over, the economy continues to shed jobs at an Further, Fund Manager Van Hoisington, who has
alarming rate. Charles Biderman, TrimTabs been running treasury portfolios longer than many
Wall Street Professionals have been alive, asserts that
the slack in our productive capacity, with record
Copyright 2009, Farragut Resources, LLC. The material presented is for informational purposes only and is not intended to recommend a specific investment strategy or the
purchase of securities. All opinions are those of the author, and do not reflect the policies of Farragut Resources or Capitol Securities Management, Inc. Investment advisory
services and brokerage provided through Capitol Securities Management, Inc, Member FINRA/SIPC.
unemployment and manufacturing utilization at six- borrowed money. Prices of land, shares and
decade lows, should keep price pressures muted commodities have been bid up as speculators put to
until the deflationary impact of much higher tax rates work the increased lending of the banks. These
begins to appear. valuations are increasingly hard to justify.
Accordingly, we have taken some profits in Chinese
Interestingly, Hoisington’s tax analysis is based on shares.
research by Christina Roemer, the current chair of the
President’s Council of Economic Advisors. A 2007
study by Roemer found that each dollar rise in taxes
Readiness
will reduce private spending by $3. The implication is
He who sees a need and waits to be asked for
that paying down our Federal debt may create a help is as unkind as if he had refused it.
measurable drag on the economy for some time to Dante Alighieri
come.
As part of our Planning Practice, we’ve been
Stocks conducting quite a few Insurance Policy Reviews.
With updated mortality tables, the collapse and/or
Bernard Baruch also said that bears don’t live on Park crippling of many iconic insurers, and the persistent
Avenue. Regardless of the daily news, there is passage of time, there’s much to be gained by an
always a bull market somewhere, and we strive to objective, professional assessment of your current
participate where we understand the risks. This has coverage.
led us to invest in select Blue Chip firms, Resource and
Commodity-related shares, and the Chinese We’ve found the art of insurance is in sizing coverage.
Phenomenon Outside of an Annuity, where the longer you live, the
better the deal, most Insurance is bought in the hope
Pretty much all stocks are up from their lows, though you never make a claim. The trick is to buy the
the underlying health of many issuers has minimum necessary. Keep in mind, the industry
deteriorated further. In other words, the sharp rise in seeks to sell as much as possible. Nevertheless, most
stock prices of the past several months can be anyone whose earnings support the welfare of
attributed not to an improvement in business another has a moral duty to maintain modest
conditions, but solely to a change of sentiment - a insurance coverage.
rise in animal spirits.
Where we see the most interest, and the greatest
As of August 3rd,
S&P earnings were down 33.4% and confusion, is in the area of Long Term Care Insurance.
sales have declined 17.4%, respectively, quarter over Many of us will require assistance as we age, and
quarter. For analysts expectations to be met by while some are blessed with strong and dedicated
year-end, earnings must increase by 114.9% in two spouses or children, not all are, and not all find such
quarters, and revenues must stage a 22% increase in an arrangement fair. By providing for the expense
the next 6 months. Let’s hope those animals keep of this care in advance, a policyholder has
their spirits. eliminated one of the greatest sources of stress a
family can endure.
High-Quality Blue Chip Shares are the cornerstone of
a long-term investor’s portfolio. Our focus remains A distinguishing feature of our practice has been a
on reputable firms with sound prospects, preferably dedication to maintaining a high degree of
with a sustainable dividend. Not too many either. competency in all aspects of the financial planning
The benefits of diversification diminish sharply after process. This is accomplished through collaboration
ten or so stocks are added to a portfolio, and then with allied professionals (CPAs, JDs, CLUs), as well as a
you have the challenge of maintaining confidence in substantial ongoing investment in Continuing
dozens of disparate investments. Professional Education, Licensing and Certification.
Our clients appreciate us as keen investment
Resource and Commodity Shares constitute a managers who understand and respect risks of all
material portion of our portfolios. The 75 percent sorts.
collapse in Commodity Indexes last Fall was far
greater than the drop in industrial activity and Frank J. Ruffing CFP
McLean, Virginia, August 6, 2009
consumption. Prices will fluctuate, yet ultimately the
frank@farragut.us.com
world needs Stuff, and Stuff starts with Commodities.
Gold, in the form of Index Shares or Mining Stocks
remains a meaningful hedge against the unforeseen.

Chinese Shares continue their torrid ascent. While

the economy of the People’s Republic has
responded well to the mandates of the Party, a 7918 Jones Branch Drive, Suite 800 McLean, VA 22102
consequence has been unbridled speculation with Telephone 703-283-5220 www.farragut.us.com
Copyright 2009, Farragut Resources, LLC. The material presented is for informational purposes only and is not intended to recommend a specific investment strategy or the
purchase of securities. All opinions are those of the author, and do not reflect the policies of Farragut Resources or Capitol Securities Management, Inc. Investment advisory
services and brokerage provided through Capitol Securities Management, Inc, Member FINRA/SIPC.