January 9, 2006

To Our Clients and Friends,

Optimism or pessimism?
In life, we have control over very few "things." Our attitude is one of these "things" we can control. We can choose to be either optimistic or pessimistic. I personally choose to be an optimist. When it comes to the economy and the stock market, the media most often is pessimistic. So, I thought I would share with you two brief articles I recently read that have the opposite point of view with respect to the American economy.

Resiliency Triumphant by Nick Murray
"The Commerce Department reported at the end of October that third quarter GDP - after Katrina, Rita, and all the collateral damage - rose 3.8%. Anyone who had been watching television throughout the month of September would have assumed - nay, known for a fact - that this was impossible.

I've often said - that people cannot plan intelligently for, much less invest successfully in, a future of which they are fundamentally afraid. And virtually all of the mainstream "news" to which they're exposed every day is an exercise in fearmongering.

On some level, economic and market fearmongering is based on the fatally flawed presumption that the American economy is fundamentally brittle and unstable - that it is constantly teetering on the brink of disaster, and that it is vulnerable to virtually any disruption. This is the premise of all journalistic reportage of the economy.

So that when a great natural and human disaster takes place - e.g. Katrina's devastation of the Gulf Coast in general, and the senseless, needless plight of New

Orleans in particular - journalism goes into spasms of extrapolation. It tells us that hundreds of thousands of jobs have been permanently "lost," that Gulf of Mexico oil production offshore - and refining capacity onshore - has been secularly ravaged, that the cleanup costs will bust the federal budget, and that the resulting economic chaos may plunge the country into recession.

Whereupon the economy is shown to have grown 3.8% in the quarter. (Without Katrina and Rita, it might have been close to 5%). Indeed, this was the sixteenth consecutive quarter of economic growth, and the tenth in a row in which growth exceeded 3%. During those same ten quarters, real business investment - the collapse of which was the root cause of the most recent recession - rose at an average annual rate of 9%. Oh, and by the way: for the government's fiscal year ended September 30th, federal revenues grew an estimated $274 billion, or 14.6%, thereby continuing to shrink the federal deficit.

Let some good come out of the recent disasters for all your clients. To wit: give them permission to see the terrible damages of September - followed by the incontrovertible evidence of the economy's phenomenal depth, flexibility and resilience - as a welcome end, for all time, to the myth of a fragile economy. Yes, there will always be an economic cycle. Yes, there will always be sudden shocks, natural and man-made. A twelve and a half trillion dollar economy - entrepreneurial, information-based, and above all flexible - will absorb and overcome them. And it will do so not faster and better than mainstream journalism said it would, but than anyone thought possible. Never underestimate this economy. It's getting better all the time.

Let there be optimism on earth and let it begin with me."

Mankind's Greatest Invention - The Free Market by Alan Greenspan
"Whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes. We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater tendency toward self-correction has made the cyclical stability of an economy less dependent on the actions of macroeconomic policy makers, whose responses have often come too late or have been misguided.

Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset. The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would surely have produced marked economic disruption, offers the clearest evidence of the benefits of increased market flexibility.

We weathered a decline on October 19,1987, of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress - an episode that hinted at a change in adjustment dynamics. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was moderated by market forces, with severe economic weakness evident for only a few weeks. More recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years. The consequence of this flexibility has been a far more stable economy."

So, in conclusion, are you an optimist or a pessimist? Bill Vaughn said, "An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves." As we enter the New Year, Karen and I want to wish you a happy, healthy, and prosperous 2006.

As usual, please feel free to call us. We are here to answer your questions, respond to your concerns, and help you make smart decisions about your money.

Very truly yours,

ZRC Financial Services, LLC
A Registered Investment Advisor

By:
         Richard P. Clarke