uecember 6, 2013

Tapering
ln our May 2013 CommenLary
1
, we made our flrsL reference Lo Lhe poLenLlal for Lhe lederal 8eserve
8ank Lo Laper" lLs pollcy of quanLlLaLlve easlng (CL). Speclflcally, we made Lwo lmporLanL polnLs: flrsL,
Lhe led would noL commence Laperlng unless and unLll Lhere were slgns of a susLalnable recovery,"
and, second, Lhe led would err on Lhe slde of pushlng a llLLle Loo far Lowards lnflaLlon raLher Lhan Lhe
oLher way around." 8ased on Lhls, we explalned how Lhere were Langlble lmprovemenLs ln Lhe sLaLe of
Lhe economy, buL lL remalned unllkely for Lhe led Lo conclude we were ln a susLalnable recovery."
1he Market Skept|cs Versus the Ied
MarkeL parLlclpanLs have conslsLenLly been ahead of Lhe led ln expecLlng a sLep back from Lhe
aggresslve pollcles lmplemenLed Lo llfL our economy ouL of Lhe CreaL 8ecesslon. 1hls makes sense ln
llghL of how Lhe economy as represenLed by Lhe sLock markeL has lmproved aL a much qulcker pace Lhan
Lhe real" economy-Lhe so-called Wall SLreeL" vs. Maln SLreeL" dlchoLomy. Whlle Lhls ls a relevanL
dlsLlncLlon, lL ls noL Lhe only polnL mlssed by Lhe dlscourse surroundlng wheLher Lhe led wlll or wlll noL
Laper. When Wall SLreeL analysLs speak of Laperlng, Lhey are lmplylng someLhlng deeper, whlch many
markeL skepLlcs openly and regularly lamenL: Lhere ls Lhls noLlon LhaL Laperlng ls a ma[or rlsk Lo Lhe
sLock markeL. 1he skepLlcal argumenL goes as follows. 1he sLock markeL ls noL rallylng for fundamenLal
reasons. 1he economy ls noL really lmprovlng. 1hls rally ls happenlng purely because of CL." 1he follow-
on loglc ls LhaL as soon as CL ends (aka Laperlng beglns), Lhen Lhe rally wlll all fall aparL. Agaln, Lhe
embedded assumpLlon here ls LhaL Lhe real economy has noL lmproved, buL Lhe sLock markeL lLself has
rallled.
lL ls clear LhaL someLhlng does noL add up. 1he led has malnLalned lL wlll noL end CL unless and unLll we
have a susLalnable recovery, whlle Lhe skepLlcs are argulng Lhe end of CL wlll lead Lo a sLock markeL
correcLlon because we have noL had a susLalnable recovery. 1hese Lwo poslLlons are muLually excluslve,
unless Lhe skepLlcal argumenL ls acLually LhaL Lhe led wlll be fooled lnLo Lhlnklng Lhere has been a
susLalnable recovery, when ln facL Lhere has noL. lL ls lmporLanL Lo polnL ouL Lhe lnconslsLency ln Lhe facL
LhaL Lhose mosL skepLlcal of CL are calllng for lLs lmmedlaLe end now desplLe Lhls conLradlcLory reallLy.
We Lhlnk Lhls sheds more llghL on Lhe blases possessed by Lhese skepLlcs Lhan lL does Lhe sLaLe of Lhe
economy.

1
hLLp://www.rgala.com/wp-conLenL/uploads/2013/07/may-213.pdf

Alongslde Lhls skepLlcal refraln has been Lhe meme-lflcaLlon LhaL good news ls bad news." 1hls
ampllfles Lhe lnconslsLency ln Lhe skepLlcal argumenL agalnsL CL, for lf Lhls ls all an lllusory sLock markeL
rally due Lo CL, Lhen good news would ln facL be good news lndependenL of any led pollcy paLh. 1hls
noLlon ls a LexLbook example of absurdlLy. ?es lndeed, good news ls ln facL good. lL amazes us LhaL such
a slmple polnL of facL needs Lo be sald ln Lhls envlronmenL.
1he en (or M|crophone) IS M|ght|er than the Sword
WlLh Lhls heaLed dlscusslon abouL Laper, Lhe led has effecLlvely accompllshed Lwo Lhlngs: flrsL, Lhe led
has essenLlally compleLed Lhe flrsL round of lnLeresL raLe hlkes purely Lhrough Lhe power of
communlcaLlon, and second, Lhe led has also helped flush ouL whaL may have been overly speculaLlve
poslLlons ln bond markeLs ln parLlcular. Chalrman 8ernanke made an lmporLanL observaLlon regardlng
Lhe former facL ln a speech durlng november, whlch also addresses some polnLs Lalked abouL above and
seLs Lhe sLage for our dlscusslon of Lhe laLLer
2
:
llnanclal markeL movemenLs are ofLen dlfflculL Lo accounL for, even afLer Lhe facL, buL Lhree maln
reasons seem Lo explaln Lhe rlse ln lnLeresL raLes over Lhe summer. llrsL, lmprovemenLs ln Lhe
economlc ouLlook warranLed somewhaL hlgher ylelds--a naLural and healLhy developmenL.
Second, some of the r|se |n rates reported|y ref|ected an unw|nd|ng of |evered pos|t|ons--
pos|t|ons that appear to have been prem|sed on an essent|a||y |ndef|n|te cont|nuat|on of asset
purchases--together w|th some knock-on ||qu|dat|ons of other pos|t|ons |n response to |nvestor
|osses and the r|se |n vo|at|||ty. A|though |t brought w|th |t some t|ghten|ng of f|nanc|a|
cond|t|ons, th|s unw|nd|ng and the assoc|ated r|se |n term prem|ums may have had the benef|t
of reduc|ng future r|sks to f|nanc|a| stab|||ty and, |n part|cu|ar, of |ower|ng the probab|||ty of an
even sharper market correct|on at some |ater po|nt. 1hlrd, markeL parLlclpanLs may have Laken
Lhe communlcaLlon ln !une as lndlcaLlng a general lessenlng of Lhe CommlLLee's commlLmenL Lo
malnLaln a hlghly accommodaLlve sLance of pollcy ln pursulL of lLs ob[ecLlves. ln parLlcular, lL
appeared LhaL Lhe lCMC's forward guldance for Lhe federal funds raLe had become less effecLlve
afLer !une, wlLh markeL parLlclpanLs pulllng forward Lhe Llme aL whlch Lhey expecLed Lhe
CommlLLee Lo sLarL ralslng raLes, ln a manner lnconslsLenL wlLh Lhe guldance. (emphasls added)
lL ls lmposslble Lo know wheLher Lhls unwlndlng" was wlllful on Lhe parL of Lhe led, buL lL dld ln facL
help seL Lhe sLage for a reducLlon ln Lhe lmpacL of a pollcy shlfL once Laperlng does ln facL occur.
ln our !uly 2012 CommenLary, we marveled aL how Marlo uraghl, Lhe resldenL of Lhe Luropean
CenLral 8ank, Lhrough muLLerlng a few words, senL global markeLs hlgher by more Lhan 2. And you

2
hLLp://www.federalreserve.gov/newsevenLs/speech/bernanke20131119a.hLm

know whaL Lhey say: 'acLlons speak louder Lhan words.' CommunlcaLlon has played an lmmensely
lmporLanL role ln Lhe LoolklL of cenLral bankers ln deallng wlLh crlsls. Slnce uraghl's sLrong uLLerance,
pollcymakers ln Lurope have followed Lhrough wlLh some acLlon, Lhough Lhe caLalyLlc evenL remalns
slmply Lhe powerful sLaLemenL Lowards Lhe lrreverslblllLy of Lhe Luro.
3
" Cne of Lhe hallmarks of 8en
8ernanke's Lenure as led chalrman has been hls emphasls on clarlfylng and lmprovlng Lhe led's
communlcaLlon. We Lhlnk one charL ln parLlcular hlghllghLs Lhe real-world lmpacL of Lhls polnL nlcely:


1hls charL shows lnflaLlon expecLaLlons slnce 1990 based on a survey conducLed by Lhe unlverslLy of
Mlchlgan. LxpecLaLlons serve an lmporLanL role, because Lhey reflecL whaL Lhe average person Lhlnks,
raLher Lhan whaL acLually and necessarlly wlll Lransplre. ln Lhe CreaL 8ecesslon (2007-2009), Lhe u.S.
faced by far lLs greaLesL rlsk of a deflaLlonary splral, yeL noLlce how lnflaLlon expecLaLlons never wenL
negaLlve, and never goL close Lo Lhe depLhs Lhey dld ln Lhe recesslon followlng Lhe bursLlng of Lhe

3
hLLp://www.Lelegraph.co.uk/flnance/9417209/1he-euro-ls-lrreverslble-and-noL-ln-danger-says-uraghl.hLml

uoLCom bubble. CredlL for Lhls goes Lo Chalrman 8ernanke for how effecLlvely he conveyed Lhe role
led's pollcy would play ln aldlng an economlc recovery.
ln Lerms of how Lhlngs have played ouL ln markeLs, Lhe Laperlng conversaLlon alone looks very much
analogous Lo an acLual hlke ln lnLeresL raLes. 1hls ls an lmporLanL polnL conslderlng Lhe lederal funds
raLe seL by Lhe led remalns aL zero. ln facL, we have long argued LhaL Lhe role of CL lLself ls Lo help Lhe
led communlcaLe lLs lnLenL Lo malnLaln Lhe zero lnLeresL raLe pollcy (Zl8) for longer Lhan Lhe markeL
has belleved. 1hls ls so, because beLween each round of CL, Lhe markeL has repeaLedly Lurned lLs
aLLenLlon Lowards when Lhe flrsL raLe hlke would occur, desplLe Lhe led's language LhaL raLes would
remaln aL zero for an exLended perlod." WlLh CL ln place, all Lhls consLernaLlon focuses lnsLead on Lhe
CL debaLe, whlle lnLeresL raLes have remalned low LhroughouL Lhe yleld curve, affordlng all secLors of
Lhe prlvaLe economy ample opporLunlLy Lo resLrucLure Lhelr debLs. 1hls Loo geLs aL one of our favorlLe,
mosL Lelllng charLs, Lhe one whlch shows Lhe household debL servlce as a share of lncome:


1hls hlghllghLs [usL how far household balance sheeLs have come. 8alance sheeLs have qulckly evolved
from belng overburdened by debL, Lo havlng even greaLer flexlblllLy wlLh flnanclng Lhan any polnL before
Lhe prlor Lwo boom perlods.
Agaln we wanL Lo emphaslze LhaL Lhls enLlre conversaLlon abouL an lmmlnenL end Lo CL comes on Lhe
heels of lmprovlng economlc daLa, and whlle some vlew Lhese hlgher 1reasury raLes as cause for
concern, we vlew Lhem as a reflecLlon of Lhe underlylng lmprovemenLs. 1hls ls someLhlng LhaL should
make us all feel more comforLable abouL where Lhe economy ls, and ls headlng, and noL someLhlng
anyone should lose sleep over.
1here ls anoLher polnL Lo make abouL communlcaLlon. 1hls year wlll mark Lhe end of 8ernanke's Lerm as
led chalrman, afLer whlch he wlll be replaced by !aneL ?ellen. Many credlble led lnslders have sLressed
!aneL ?ellen's hlgh regard for communlcaLlon as a led pollcy Lool and belleve she wlll use lL Lo an even
greaLer degree Lhan 8ernanke has. 1hls wlll be worLh waLchlng (and llsLenlng Lo) movlng forward.
Mov|ng Iorward
Whlle we never make declslons based on led pollcy, we Lhlnk lL ls very lmporLanL Lo address and add
conLexL Lo Lhe many concerns hlLLlng malnsLream medla abouL a poLenLlal shlfL ln led pollcy. 1hls ls
reflecLlon of sLrengLh, noL a pro[ecLlon of fear for flnanclal markeLs. lL ls also lmporLanL Lo remember
LhaL Lhe sLock markeL and Lhe economy do noL necessarlly move ln lock-sLep. SomeLlmes Lhe sLock
markeL ls ahead of Lhe economy, and someLlmes lL behlnd. 1hls ls merely parL of why plcklng Lops and
boLLoms ls a challenglng Lask. Lqually lmporLanL ls acknowledglng Lhe reallLy LhaL when Lhe sLock markeL
ouLperforms lLs long-Lerm annual average reLurn by a wlde margln ln a calendar year, lL ls pulllng
forward fuLure reLurns. 1o LhaL end, we do noL expecL fuLure reLurns Lo be nearly as sLrong as Lhey have
been Lhese pasL Lwo years. 1hls ls a slmple reallLy losL on many. LasLly wlLh regard Lo Lhe sLock markeL,
when a large coefflclenL of Lhe reLurn sLems from an lncrease ln Lhe markeL's mulLlple (/L raLlo
expanslon of Lhe broader lndlces), Lhen Lhe proLecLlon afforded by valuaLlon ls lnherenLly lessened.
Plgher valuaLlon alone ls noL a rlsk ln and of lLself. 1oo many are maklng Lhls mlsgulded case. 1hls reallLy
slmply means LhaL ln Lhe evenL of a shock, Lhe markeL has more downslde rlsk Lhan lL has ln Lhe recenL
pasL. 1hese polnLs maLLer more ln Lhe conLexL of how Lhey should shape our expecLaLlons movlng
forward Lhan Lhey do ln Lerms of Lhe acLual rlsks faclng our companles' earnlng power.
uesplLe Lhe markeL's conLlnued rally, we see llLLle reason Lo change our overall poslLlonlng. As we
explalned ln recenL monLhs, we have a healLhy allocaLlon Lo equlLles ln Lurope, whlch are only lmpacLed
lndlrecLly by led pollcy, and we already Lrlmmed our lower convlcLlon uS poslLlons. Cur cash balance

remalns raLher plush. lf Lhe markeL keeps grlndlng hlgher, lL ls all buL cerLaln some of our remalnlng
poslLlons wlll pass Lhe upper reaches of our falr value range aL whlch polnL furLher selllng would be
warranLed, Lhough Lhere are no guaranLees.
Cne markeL dlsconnecL LhaL we have boughL lnLo ls Lhe munl bond markeL. We wlll look Lo lncrease our
sLake ln Lhls area over Lhe comlng monLhs. 1hls asseL class ls senslLlve Lo lnLeresL raLes conslderlng lLs
long duraLlon, Lhough Lhrough Lhe use of vehlcles llke Closed Lnd lunds, many of whlch are Lradlng aL
sLeep dlscounLs Lo Lhelr neL asseL values, we Lhlnk we can boLh mlLlgaLe rlsk and puL ourselves ln
poslLlon Lo generaLe a nlce reLurn.
1hank you for your LrusL and confldence, and for selecLlng us Lo be your advlsor of cholce. lease call us
dlrecLly Lo dlscuss Lhls commenLary ln more deLall. ?ou can reach !ason or LllloL dlrecLly aL 316-663-
7800. AlLernaLlvely, we've lncluded our dlrecL dlal numbers wlLh our names, below.
Warm personal regards,



Jason Gilbert, CPA/PFS, CFF
Managing Director
O: (516) 665-7800
D: (516) 665-1940
M: (917) 536-3066
jason@rgaia.com
Elliot Turner, Esq.
Managing Director
O: (516) 665-7800
D: (516) 665-1942
M: (516) 729-5174
elliot@rgaia.com
















[This page is intentionally left blank]












Past performance is not necessarily indicative of future results. The views expressed above are those of RGA Investment
Advisors LLC (RGA). These views are subject to change at any time based on market and other conditions, and RGA disclaims any
responsibility to update such views. Past performance is no guarantee of future results. No forecasts can be guaranteed. These
views may not be relied upon as investment advice. The investment process may change over time. The characteristics set forth
above are intended as a general illustration of some of the criteria the team considers in selecting securities for the portfolio.
Not all investments meet such criteria. In the event that a recommendation for the purchase or sale of any security is presented
herein, RGA shall furnish to any person upon request a tabular presentation of: (i) The total number of shares or other units of
the security held by RGA or its investment adviser representatives for its own account or for the account of officers, directors,
trustees, partners or affiliates of RGA or for discretionary accounts of RGA or its investment adviser representatives, as
maintained for clients. (ii) The price or price range at which the securities listed in item (i) were purchased. (iii) The date or
range of dates during which the securities listed in response to item (i) were purchased.