Author: Eric Linser, Green Valley Wealth Advisors
Covestor model: Eagle Portfolio
Back in the late 90’s Alan Greenspan (then the Chairman of the Federal Reserve), ever the master of obfuscation and cryptic speech, created the phrase “irrational exuberance”. Those two words, unusually clear in interpretation from Mr. Greenspan, entered the lexicon of the investment world and remain with us today.
The phrase was originally meant to describe the Dot.Com Bubble before it became the Dot.Com Bomb. These two words can be used to describe real estate price movements, commodity prices, and a whole host of other asset bubbles that we have seen come and go (the current one being in US Treasury bonds).
In 2010 current Federal Reserve Chief Ben Bernanke gave us another phrase, “unusual uncertainty”, to describe the economic outlook for the global economy. I think that phrase is a good description of the world we find ourselves in today. In addition, Ben Bernanke also gave us the colorful phrase “quantitative easing” to describe unconventional monetary policy to stimulate the economy when conventional methods proved ineffective.
In the investment world, the knowable and unknowable often cross paths. The uncertainty arising from this conundrum provides the backdrop for a variety of opinions and potential outcomes that markets agonize over and re-evaluate on a daily basis. By listening to the news and reading what’s in the press, one often finds a myriad of opinions on both sides of every issue, with each likely containing reasonably thought-out opinions and data to back up their views.
My job, of course, is to review these issues and devise strategies that attempt to balance the challenges and rewards on different sides of the equation. This is an area where my investment discipline and process focuses on what is controllable, seeing that decisions made about what is not controllable are often reactionary, short-term oriented or are simply hard to get right.
In the second quarter much of the optimism from the first few months of the year was tempered as the realities of slowing economies worldwide and no quick fixes to European troubles resulted in more volatile stock trading while affecting some areas of the bond market as well. For the most part, portfolios are still positive for the year, just not as positive as they were at the end of the first quarter.
In the US, a dynamic start to the year from an economic perspective, perhaps due to a warmer-than-normal winter, gave way to some payback in the spring as less inspiring reports and continued high levels of unemployment weighed on investor sentiment.
Despite the negative headlines however, conditions have indeed improved and growth is occurring, albeit at a slower pace than many policymakers and investors would like. Of course the rhetoric about these issues is likely to be intensified in an election year like this one even though slow growth is not entirely surprising and is indeed consistent with the mainstream economic predictions of the last several years.
Looking at the situation outside of our borders, several positive threads have woven their way into the fabric of the current environment. In Europe voter sentiment has indicated again and again that retaining a common currency and monetary union is preferable to disbanding it.
In the emerging markets slowing growth is being addressed by monetary stimulus in an effort to prevent a hard landing, especially in China, which appears to be transitioning from a developing market nation (characterized by super-growth) into a moderate (although still high) growth economy and world power.
Lower economic expectations have resulted in positive by-products of sharply lower gasoline and energy prices, which serve to reduce the pressure on global consumers and remove a headwind to consumer spending and economic growth.
Lastly, investment markets appear to have discounted, or priced in, the world’s problems to a significant degree — equity markets in the US, Europe and the emerging markets look like good values from a bottom-up and top-down basis (analysts’ and strategists’ views, respectively), which should bode well over the medium term for positive return opportunities.
In this time of unusual uncertainty, I wouldn’t be at all surprised to see more volatility than we might like going forward given a soft labor market and little political effort in Washington to avoid the so-called fiscal cliff at the end of the year when tax cuts on wages, capital gains, dividends and estates are scheduled to lapse; and automatic spending cuts kick in, raising the risk of recession.
These uncertainties will leave the economy limping along at a rate that doesn’t inspire confidence by consumers and business owners alike. In addition, I expect the capital markets for the balance of 2012 to continue to be influenced by external macroeconomic concerns including fiscal and monetary policy in the US and the ongoing European debt crisis.
The good news out of all of this is that these things are known – they’re not surprises. Ultimately I believe that solutions will be found, compromises made, and the animal spirits of capitalism will overcome governmental ineffectiveness as both the bourgeoisie and the proletariat need each other to increase their economic standing.
We cannot let the lessons of the Great Recession go to waste; reforms must be made at all levels – we must live within our means, be it our own households, municipalities, state or federal government. Sacrifices must be made; there cannot be sacred cows immune from reform. As we work through these items, we will be building a stronger foundation for future growth in the US.
I firmly believe that better days are ahead for America (even though a lot of people get impatient with the pace of change). I suppose we’re in a period akin to that of the Reconstruction Era following our Civil War, portending a necessary transformation of state and society.
“Because things are the way they are, things will not stay the way they are.”
I hope you are enjoying the best that summer has to offer with family and friends.
Wishing you good health, wealth, and wisdom,
Eric Linser, CFA