Smooth Sailing Ahead?
(Note: this is a companion piece to “Brace Yourself”)
2012 finds us at a bit of a crossroads. All the doom and gloomers are still out there, but so is America, doing just fine thank you. We've had some pretty harrowing politics last year, mainly financial...bin Laden is dead and the war in Iraq is officially over. While 2012 may be one of the most important and divisive elections America has had in at least a generation, we may take some comfort in knowing that while what we have is at times dysfunctional, "democracy is [still] the worst form of government except all those other forms that have been tried…” For investors, does this really mean that we can expect the tide to favor taking a dip?
Before even contemplating that question, many will be confronted with a gigantic obstacle. Indeed, many, many, many, many pundits and publications have cited the Great Wall of Worry to be the most imposing barrier against a global recovery. But who really is on the other side? Do they have a conscience? Are they really our Savior and Salvation? Can we possibly know what is going on over there?
I think a lot of the commentary is overblown. The Chinese may be scrappy, but they’re still small, and in general weak. They may be growing faster than us, but this growth alone will not save anyone except the 600 million Chinese still mired in rural poverty, especially when their growth stems from such a small base. In this sense, the converse is also true…if China experiences a hard landing, either 1) it simply won’t be that big a deal for us, or 2) the world would have already experienced something far worse. So, rah rah rah, cheer China on…!
I don’t profess to knowing much about Europe… I attribute the poor performance of my portfolio last year to not fully fleshing out the nuances that stemmed from the Euro crisis, especially the (hopefully) short term consequences of a liquidity event originating from Europe. Nonetheless, I’ve made some general observations going forward:
- Europe’s crisis is actually not that bad…it’s just that the structure of their governance has exacerbated the situation. This ineptitude by government authorities mirrors what is widely cited as leading contributors to our own Great Depression. The Great Depression saw an upswing after 4 years…we’re in year 3 right now of this Euro mess.
- The vast majority of “foreign debt” owed by many European countries would no longer be classified as “foreign” if they underwent political union. Without “foreign debt”, Europe would not be experiencing a crisis right now.
- Bond rates are finicky. If the Europeans can solve their problems, rates will decline, and fast.
- Europe’s overall fiscal problems are very similar to our own, taken in aggregate. However, that’s the problem…refer to points #1 and #2. “Europe” as a political entity has proven to be about as effective as the League of Nations, and has thus far produced similar results.
Do I have any idea what will happen in Europe? Sure I do, but I turn to more experienced hands for this matter.
And now, the crème de la crème, America. I am not going to discount America’s political problems this year, which I think are considerable. I think the solution is to cut entitlement spending and raise taxes on the wealthy, meaning that I would not have a chance in heck running for office here. If we can somehow accomplish this without Occupy turning into an “American” Spring, then I think we’ve got a decent shot at a full recovery from the 2008 crisis. It will take time, but it can start here, and now.
So, smooth sailing ahead? Only if we stop pretending we’re on the invincible “Titanic”. And I sincerely hope we’re pretending.
Disclosure: The author is long GLD and select multinational commodity producers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: See article for full disclosure statement, thank you.