Martin Capital Management: 2010 Annual Report

One would’ve thought the near-death experience of many investors and institutions in 2008 and early 2009 would have humbled an entire generation. But shortly after the government focused its seemingly limitless resources on postponing the day of reckoning, the mood of the markets flip-flopped in the spring of 2009 from fear of loss to fear of falling behind. Government intervention essentially pre-empted the natural market-clearing process during which equities have typically plunged to back-up-the-truck valuations. Stocks were only fleetingly on the bargain counter, and we took advantage of the moment to selectively purchase mispriced companies. It’s our belief, however, that stocks didn’t stay cheap enough long enough to induce a permanent change in speculative behavior—the type of event that has normally been associated with the end stages of historically significant bear markets—and begin to build the solid foundation for what will eventually become the next secular bull market.

We remain steadfast in our belief that the ongoing massive experiment in government intervention can postpone but, wishful thinking aside, cannot prevent the return of a tighter correlation between stock prices and intrinsic value. Piling more debt on top of an economy already choking on it is no cure. Flooding the economy with money creates huge distortions. A policy of monetary alchemy that converts income from workers and savers into capital gains for a comparatively select few seems ill-suited to promote economic recovery. Frugal senior citizens and others who have saved and have played by the rules are earning nothing on their savings, while big debtors and too-big-to-fail oligopoly banks benefit from their subsidy. The act of saving itself has been discouraged by interest rates set near zero, but those same low rates have not spurred an increase in housing and investment spending. Speculation has filled the void, returning with a vengeance. Since the greatest moral hazard of intervention is the widespread belief that Uncle Sam will cushion the fall when bubbles pop, a new bubble in stocks and low-quality debt has already reached dangerous proportions.

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Related book: A Decade of Delusions: From Speculative Contagion to the Great Recession