So, here we are some two and a half years out from perhaps the most severe financial implosion we have experienced since the Great Depression, and the global economy once again is in crisis mode. Economic indicators suggest the global recovery is slowing, inflation is on the rise in the emerging markets, China’s momentum is slowing, and the debt crisis in both Southern Europe and the U.S. is once again dominating headlines.

It would appear that we are at an inflection point today with respect to the “social contract” between governments and the people that they serve. Promises have been made that will be hard to keep, and capital markets are forcing the hands of policy makers around the globe. Like a persistent bill collector, the markets are now demanding payment for the profligacy that has built up over time.

Deregulation over the years in the financial services industry and advances in technology have spawned a plethora of innovative investment strategies and vehicles designed to take advantage, often on a highly leveraged basis, of short term market fluctuations, which further accentuates the daily pricing volatility in equity markets. The confluence of too much debt, the absence of near-term political will, and highly leveraged financial instruments has created a level of stress in public equity markets that tests the resolve of even the most resolute of investors. Until policy makers formulate a credible long term workout plan, equity markets are likely to remain volatile. As we stated earlier, the proverbial can which has been kicked down the road for some time now has suddenly become a lot heavier.

In the interim, what can investors do to try to intelligently keep their capital working for them in such a volatile macro environment? On the one hand, you could call it a day and retreat from markets and go to cash, which by the way pays you virtually nothing, and simply wait for a better time. But how will you know when to return? Think of all those investors today who were forced out by comparable volatility in 2008 and missed the last two-year run-up. We are sensitive to the fact that market volatility can be devastating for those who frequently need access to their capital. However, for those with more patient capital, markets such as these can afford investors with rare pricing opportunities, which over longer measurement periods, should prove to be quite advantageous.

About Tweedy, Browne

Tweedy, Browne Company LLC, a successor to Tweedy & Co., was first established by Forrest Birchard Tweedy in 1920 as a dealer in closely held and inactively traded securities. The Firm’s 91-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment advisor.