NOTEWORTHY

Chevy Chase Trust - Investment Update, Fourth Quarter 2018

Investment Update: Third Quarter, 2012

Economic Conditions (Audio Version)
The global economy is slowing. We expect roughly 2.5% growth in 2012 and probably a little less in 2013. This is down from 3.9% in 2011 and 5.3% in 2010. CCT Asset Management analysts do not believe that U.S. GDP growth will even meet this 2012 global estimate. We project under 2% for 2012; the first two quarters were 2% and 1.3 %, respectively.

The major risks to the U.S. economy continue to be unresolved issues in Europe, weak personal income and employment in the U.S. (spreading abroad), and, importantly, the tax hikes and spending cuts scheduled for 2013 unless Congress acts. The latter speaks to the broader problem of a political divide so intense that it is has produced a pervasive gloom and resignation regarding our ability to deal with any of the major domestic policy issues. Undoubtedly, this is having an adverse effect on business investment and employment.

GDP growth at the level we project will not reduce unemployment in a meaningful way, or, indeed, absorb new entrants in the labor force. Restoration of healthy economic growth requires a significant increase in the labor force. No important economic indicator suggests this is forthcoming; not employment, investment, retail sales, or the velocity of money (a measure of economic activity). Four years into the Federal Reserve stimulus program, the velocity of money continues on a downward slope.

In light of the immense Federal Government stimulus, compared to prior post-recession periods, the economic recovery has been unimpressive. We are growing at 2%, when in past recoveries, with much less stimulus, growth of near 5% was common. Moreover, under 20% of the growth is real; that is, more than 80% is attributable to inflation.

Despite this, our longer-term view is positive for the U.S. economy. Unless we are completely self-destructive, the new found domestic energy resources are a game changer, as noted in previous reports. Also, we believe that the European Central Bank will continue to refund maturing
sovereign debt by, essentially, printing money, at least for the major players, until an acceptable transition is accomplished. We also believe that the U.S. Federal Reserve Board will continue its monetary easing operation until the domestic economy shows more growth and inflation levels are elevated.

Investment Strategy
We are maintaining equity investments in our core sectors by initiating purchases when prices meet our targets. At times, this requires patience, but patience is part of our DNA. We are maintaining bond investments, in the aggregate, at a relatively short duration to preserve capital. Avoiding permanent impairment of capital is also in our DNA.

Last quarter, we elaborated on one of our central themes, food; previous reports discussed energy and water. Since our comments on food, the droughts here and elsewhere have worsened, highlighting the tight food commodity supply situation. The growing global population, expected to reach nine billion by 2050, may require 1.5 billion metric tons of additional grains and oilseeds. We are optimistic about our investments in food, agriculture and their derivatives.
In this report, we focus on our interest in electrical transmission, another key theme of Chevy Chase Trust. The world’s electrical grid and transmission infrastructure need significant upgrade. Electricity demand is expected to increase 84% from 17, 200 terawatt hours (TWh) to more than 31,700 TWh by 2034 (Price Waterhouse Coopers), requiring significant capacity expansion.