East Coast Asset Management on the Deflation-Reflation Continuum: Investor Letter ~ market folly

Tuesday, February 2, 2010

East Coast Asset Management on the Deflation-Reflation Continuum: Investor Letter

Continuing our deluge of resources, we present East Coast Asset Management's fourth quarter 2009 investor letter below. Their in-depth market commentary focuses on the topics of recency bias, the deflation-reflation continuum, and their portfolio outlook going forward.

On recency bias, they highlight that investors have focused on the past decade of returns and are fixated on the fact that bonds have outperformed equities over that timeframe and investors all of a sudden think that stocks are "too volatile." East Coast points out that you simply have to draw back to the larger picture to see that from 1939 to present, stocks have seen a compound annual return of 10.63%, besting bonds (which returned 6.23% annualized).

Turning to the inflation versus deflation debate, they have concluded that inflation seems to be the bigger of the two concerns going forward. They highlight that the key indicator to watch will be the money supply. We've seen a massive expansion in the monetary base, but it has not yet materialized in the money supply. East Coast believes that as the economy recovers and as banks begin to lend again, we'll see an increase in the velocity of money, "a key catalyst for inflation." John Paulson of hedge fund Paulson & Co pointed to the money supply as a key indicator as well in his presentation for his new gold fund.

Overall, a great read and you can download the .pdf here. East Coast Asset Management's investor letter is embedded below in two formats. Firstly, here it is via Docstoc:

And here it is via Scribd:

We've been posting a lot of investor letters as of late that are chalk full of research, methodologies, and insight. Just yesterday, we posted up Grey Owl Capital Management's letter, hedge fund T2 Partners' annual letter, and we've compiled plenty of other investor letters so definitely check them out.

blog comments powered by Disqus