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The Advisor for Welsh Money Management is E. James Welsh (born February 25, 1950), Graduate of St. Thomas College, St. Paul, Minnesota, Sociology degree, and 1972. Mr. Welsh entered the investment securities industry in 1979 as an account executive with Blunt, Ellis, & Loewi. In 1981, he started the training program for investment executives and was named Vice-President of Investment Marketing in 1983. Mr. Welsh's research into the effect of financial liquidity on stock and bond prices began in 1978 and resulted in the Monetary Composite in 1984. His research into quantifying market momentum through the use of technical analysis resulted in the development of the Intermediate Trend Indicator in 1989. Mr. Welsh makes all the investment decisions. His own money is invested in the program and is moved when client money is moved. His market and economic views have been quoted in Barron's, a national business publication, the San Diego Tribune, Income Digest, and the Dick Davis Digest. He has been interviewed frequently on San Diego business talk shows, the Business Channel in Chicago, and WEBfn.com. Mr. Welsh has also been active in the local community. In 1989 and 1990, he was Chairman of the "Swing With Your Heart" benefit, which raised $60,000 for drug education programs for the Encinitas School District and Casa de Amparo, a home for abused children. The local chapter of the Jaycees named him outstanding Jaycee of 1990. In 1991, Mr. Welsh established the Encinitas Education Foundation, serving as President until July 1993. During this period more than $300,000 was raised for elementary schools in Encinitas. In 1996, Mr. Welsh assisted in the establishment of the LaCosta Canyon High School foundation. In 1997, 1998, and 1999, he served as President of the LCC Foundation, which raised more than $600,000 during his tenure. James Welsh resides with his wife and two daughters in Carlsbad, California. TOPICS The effort to reflate the US economy through monetary and fiscal stimulus, and the depreciation of the Dollar has been unprecedented. The shift in monetary policy from fighting inflation, which had dominated since 1979, to fighting an unwanted substantial fall in inflation is the biggest financial news story of 2003. It underscores the threat deflation posed, since the Fed's willingness to create to another bubble in stocks outweighs the damage deflation would have caused. The tax cut provided an artificial jump-start, since there was no pent up consumer demand as housing and auto sales remained strong even during the slowdown. In every other cycle the pool of pent up demand enabled the economy to enjoy a surge at the end of prior recessions. In this cycle, this surge was probably more important in getting corporate America to become confident enough to begin some hiring and increase capital spending. Manufacturing generates more downstream economic activity than any other sector. The depreciation of the Dollar will help exports, but does not come without risks, since foreigners buy 40% of Treasury bonds. The willingness to depreciate the Dollar further underscores the level of deflation concerns policy makers felt. Going forward, the Fed has clearly stated that policy will remain accommodative for a "considerable period." This statement is based on the Fed's assessment of excess capacity in production and the labor market, which they expect to last until 2005. How quickly this excess capacity is utilized will drive the Fed. If capacity tightens sooner than they expect, the markets will anticipate the beginning of the Fed's shift from being accommodative to neutral. Right now, the equity market is happy to take the Fed at its word. The Bond market is less sure, which is why the Fed has provided a steady dose of hand holding via speeches and statements by numerous Fed board members. During the last three years corporate America has focused on cutting costs. This emphasis will continue and is one of the primary economic risks. Consumer spending has been buttressed by rising home values, refinancing, and cash out activity. Hiring will have to pick up to offset the slackening from housing. Unless job growth averages more than 150,000, consumer demand will soften. Capital spending will also have to strengthen from current levels. This will be determined by how quickly excess capacity is utilized. One sign that this is occurring in a meaningful way will be a rise in bank lending. This will show that companies are confident enough and that excess capacity has shrunk enough to make companies willing to take on debt and build additional capacity. The economy is in the process of slowing from 8% GDP to 4%. This suggests that it is more likely that various economic reports will come in less than expected. Earnings are going to be good. To the extent that this improvement is already priced into current levels, stocks won't benefit from the reports. Cyclical stocks are very extended. If they don't rally on good earnings, they will be ripe for a sell off. Sentiment surveys reflect a high level of optimism. Despite the excessive bullishness, investors will need something that challenges the consensus that the economy is in good shape and the Fed will hold steady, for the market to suffer anything more than a 4% -7% correction. Technically, the market is strong. The fact that it is very overbought is a sign of strength, not weakness. Some other risks, besides terrorism, that could impact the market in 2004. The Chinese are forced to raise rates, slowing their economy. A democrat seriously challenges Bush. It almost doesn't matter which one, since all the democrats want to raise taxes and favor protectionism. Long term the greatest risk is the level of debt. In prior recessions, consumers lowered debt and improved their savings rate. Although the savings rate has risen to 3.5% from 0%, it is still less than half its long term average of 8%, which was maintained from the mid 1960s to 1995. Rather than falling during the last slowdown, debt levels have risen to record levels. Household debt as a percentage of GDP is up to 82% from less than 50% in 1985. This makes the economy more sensitive to higher interest rates, and explains, in part, why it takes less tightening by the Fed to slow the economy, and more stimulus to revive it. Unless the Fed is able to get rates high enough during this expansion, my guess is at least to 4%, they won't have much leverage to stimulate the economy during the next slowdown. This suggests that the Fed may have merely postponed a date with "an unwanted substantial fall in inflation" (Fed speak for deflation), rather than eliminating its threat as the consensus currently believes.
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