There were several driving forces affecting market
conditions in year 2012. The year opened on a very strong start. In fact much
of the overall market gain in 2012 occurred in the first six weeks of 2012. The
rest of the year could best be characterized as one finger nail biting
financial crisis followed by another, with a measure of election year political
uncertainty thrown in for good measure.
The first crisis was the deteriorating economic conditions
in Europe and the inability of governmental policy-makers to develop a
constructive program to address it. While never really resolved over the course
of the year, it was pushed off center stage by our own home grown financial
crisis in the United States that came to be known as the fiscal cliff, and
similar to their European counterparts, the inability of our own government
political leaders to develop a constructive resolution. In each of these crises
some sort of gerrymandering solution was developed; but the underlying problems
remain not addressed with sustainable policies. The uncertainty of these
circumstances created of great deal of volatility in the investment markets. In
each case heightened tension increased the fear level of the markets and caused
consequent drops in the markets. In each case, as well, the fears gave way to
relief rallies in the markets as some policy was cobbled together to at least
temporarily address the issues.
While the markets have started the year strongly, it is
inevitable that will see these crises reemerge in 2013. In fact, it is highly
likely that we will see a return to the same sort of volatility we experienced
in 2012. The United States government has already reached the debt limit
allowed by law, and while an agreement was reached with respect to taxes, the
only agreement with respect to the mandatory budget cuts, known as
sequestration, was to defer them for two months. This means that by March we
will see the political and economic tensions again escalate, and market fears
and uncertainty increase.
The issues at hand are very significant and marginalizing
them into just another economic crisis would be poor judgment. The potential
consequences mean there is there is not really no one safe harbor. Cash or
bonds, the traditional conservative investments have to also be considered as
at risk. Considering cash, in US dollar form, to be conservative would be to
not recognize the link between the guarantor of the US dollar, the U.S.
government, and the intractable financial problems that have brought it to the
financial cliff, or are pushing it to have to continually increase its
allowable debt ceiling. Bonds are also at risk as interest rates begin to rise
from an unsustainable low interest rate environment, bond values, especially
those long-term in nature, will decline in value. Indeed, as the markets have
started 2013 strongly, many bonds have declined in value because of interest
rate pressures.
One thing that seems to be fairly certain is that crises do
resolve themselves, one way, or another. At this point we can only speculate on
how that will occur. The worst case scenario would be a total global financial
collapse and an ongoing subsequent global depression. While this cannot be
dismissed as an impossible event, I see the probability of this as being
extremely small. There is a great deal of potential economic vigor and
potential growth. At present the main problem is the huge overhang of legacy
debt. This is putting a damper on economic expansion and its consequent
investment potential. Over-indebtedness is always dealt with by some sort of
restructuring. That is what I would expect as a resolution in this case as
well. What that restructuring will look like remains to be seen. However, as
this process unfolds, we will see the economic vigor and investment potential
be released. My take is that 2013 will be a pivotal year in beginning that
resolution process. While I expect to see heightened volatility, I also expect
to see the investment markets becoming more and more attractive as the year
unfolds. As the year unfolds, I will be trying to steer a balanced course
between the volatility and the potential longer term opportunities through
maintaining well diversified portfolios.
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