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ClearBridge Investments - Market Review Q1 2015

Posted by WrapManager's Investment Policy Committee
June 3, 2015


Legg-Mason ClearBridge's Senior Portfolio Manager, John Goode, provides his first quarter market review.

"Tales from the Past and the Future

Perspective about the future requires speculation about developments over a time period which often is not helpful for near and intermediate term investment decisions. However, there are times in history when it is necessary to step out on a thin intellectual limb and try to make sense of some of the very big developments that may be especially important over the next 7-10 years. In doing this, it is necessary to look back in time to understand how we got here and where we might be going.

We begin in Great Britain in 1675 and come forward to the present to show how unusual the last 70 years have been relative to the previous 270 years. For most of the time since 1675, credit grew broadly in line with the economy’s (England-Britain-United Kingdom) productive potential, structural inflation was limited or non-existentand real interest rates rarely strayed far from zero. In the period up to the early 1900s, two things acted as a brake on unfettered credit expansion. The gold standard was in force in Great Britain (until 1931) which prevented the explosive creation of money and credit. Only during periods of war was the link between Britain’s currency and gold broken, such as when it fought the Napoleonic Wars or World War I. During periods such as these, the government could create and borrow money to fund the war effort, which created temporary bursts of inflation. When the wars ended, inflation reversed and the adherence to the gold standard returned which once again disciplined money and credit creation.

A second important brake on inflation was the ownership structure of banks. Until the late nineteenth century, most banks were partnerships. Due to the unlimited liability of a partnership, the bank owners’ personal wealth was literally on the line which guaranteed prudence in both the quantity and quality of lending. The equivalent of sub-prime mortgages or junk bond1 lending did not exist until very recently. As a result of the discipline which came with the partnership form of bank ownership, asset leverage was very low, often just two times equity capital. With the transition to joint-stock companies, owners’ liability became limited and there was a massive increase in bank leverage ratios. In Europe and America today commercial bank assets are often 20 times capital and in the last decade leverage ratios were even higher. In the U.S. in 2007-2008 capital ratios exceeded 30-to-1 in some cases." Download below to read more.

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Economic/Market Outlook ClearBridge Investments LLC