From the January 2009 issue of Wealth Manager Web • Subscribe!


Barack Obama's historic victory last month proved that the American people are ready for a new era in government. Limited disclosure is now pass?. More openness is the new rule of engagement.

Along with that openness is increased government intervention. It has been said on numerous occasions that Obama will usher in the next "New Deal" era--reminiscent of Roosevelt in the early 1930s. With the country facing its greatest economic challenges since the Great Depression, the parallels are uncanny,

Franklin Delano Roosevelt enjoyed a decisive victory over Herbert Hoover in 1932. Hoover's lack of popularity--perhaps outdone only by that of President Bush--was in large part due to the ongoing economic malaise. Roosevelt's progressive remedy for the Depression, called the New Deal, ushered in a plethora of new government entities that put millions to work improving the nation's infrastructure. Banking reform was also a big part of the agenda.

Roosevelt's ability to connect with people was a big reason for his popularity. By explaining the ongoing banking crisis in an easy-to-understand manner, he convinced millions of Americans not only to keep their money in banks, but to add money taken out earlier. Years later, Raymond Moley, a member of Roosevelt's "Brain's Trust," proclaimed that "capitalism was saved in eight days." Indeed, FDR's ability to replace a death spiral of panic with an upward spiral of hope marks his legacy.

Fast forward 76 years to Mr. Obama. Based on his well-run campaign and ability to garner votes from young and old, rich and poor, it appears that he has the ability to right the ship. But in order to do so, he must act quickly and decisively. As with investors, of course, who must determine which asset class holds the most promise.

Stocks are certainly cheaper than they were a year ago and offer tremendous upside as the economy recovers. But as a part of the capital structure that offers no guarantees for recovery in a bankruptcy scenario, downside risks remain problematic.

A more palatable region of the balance sheet may well be debt. Many investment-grade opportunities exist, at yields that offer equity-like returns with some protection in a worst-case scenario. The opportunity requires some flexibility with liquidity, however, and the necessity of investors to participate in an arguably unpopular asset class that may have not yet hit bottom. From a risk-return standpoint, though, it is difficult to compete against current opportunities in fixed income.

It is likely that corporate bonds and bank debt are the best place to be even if Obama is not able to contain the ongoing financial malaise. Exposure can be obtained from the few remaining hedge funds that specialize in the area, or new structures by firms that are starting to bottom-fish. But one must have a long fuse; mark-to-market valuations will be too unpalatable for nervous investors looking for an immediate payoff.

Ben Warwick is chief investment officer of Quantitative Equity Strategies, LLC, in Denver, Colo. and Memphis-based Sovereign Wealth Management, Inc.

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