Investment Policy Commentary

By Jay Willoughby, CFA, Chief Investment Officer, MLIM Private Investors and Ronald Welburn, CFA, Investment Strategist

www.mlim.ml.com

Investment Policy Commentary

OCTOBER 2005

Private Investors

MANAGED ACCOUNTS

Some general observations

Alan Greenspan, Chairman of the Federal Reserve Board,

will be retiring in January 2006 after 18 years on the job.

The general consensus, at least in the financial community,

is that he has done a good job of controlling inflation and

keeping the economy from undergoing a serious recession.

He came to the office at a difficult time, after the stock market

crash of 1987, and there was great concern that the economy

would suffer accordingly. However, he maintained sufficient

liquidity and a period of prosperity followed. There was a

minor recession in 1990 related to the first Gulf War and

again in 2001 when capital spending and corporate profits

took quite a tumble (although consumption did not experience

a down quarter). Overall, Chairman Greenspan deserves a

lot of credit for maintaining a long period of prosperity with

no major interruptions. The financial markets recognized

this prosperity in that a major bull market which began in

1982 continued after the crash of 1987 and went on with a

strong uptrend until March 2000. Since October 2002, the

equity markets have again responded positively to stronger

economic growth helped by a combination of tax cuts and

accommodative monetary policy. The bond market has also

performed well during Chairman Greenspan’s tenure with

the 10-year Treasury bond falling from 9.5% just prior to

the 1987 crash to 4.3% currently.

Chairman Greenspan has always expressed a strong belief

in free markets and the fact that prices reflect the push and

pull of demand and supply. For example, he has expressed a

belief that gold prices will signal when inflation is getting

out of control. If he has erred, it has perhaps been because

of the difficulty of dealing with the time lags of monetary

policy on real economic activity. Nevertheless, when mistakes

have been made his reliance on price signals have quickly

corrected the mistakes. A recent mistake was perhaps keeping

interest rates at 1% for too long in the belief that deflation

was a major concern in the 2003 and 2004 period. There

were a number of economists who were afraid that the United

States was about to repeat the deflationary experience of Japan

after 1989. This accommodative monetary policy contributed

to what many believe is a bubble in the housing markets,

as well as