Monday, June 4, 2012

Weekly Commentary June 4th, 2012

The Markets
It was a weak week in the world’s financial markets and these headlines from The Wall Street Journal, Saturday, June 2, and Sunday, June 3 editions, leave no doubt of that.

·         Grim Job Report Sinks Markets

·         Euro-Zone Reports Deepen Gloom

·         Asia Weakness Heightens Fears of Contagion

·         Brazil Loses Steam as World Slows

·         Dow Tumbles Into Red for the Year

·         Raw Materials in a Free Fall

·         Government-Bond Yields Sink to Record Lows

But, let’s keep something in mind. Headlines like these are designed to do one thing – get you to keep reading. By doing so, the publisher can sell more papers and charge higher rates for advertising. Fair enough.

Unfortunately, there’s an unintended consequence to this type of hyped headline. It has the potential to scare the public into doing the wrong thing at the wrong time for the wrong reason.

The fact is, scary things happen every day, however, that should not derail a well-thought out plan that has checks and balances in place to try and distinguish between short-term noise and long-term secular change.

Our job as a financial advisor is to dig beneath the screaming headlines and get to the crux of what’s happening. With a clearer understanding of the real issues, we can do a better job of discerning how changes in the economy impact the markets, and, ultimately, your goals and objectives. And, with that information in hand, we can make course corrections as needed to help keep you on track.


IN THE CLASSIC MOVIE THE SOUND OF MUSIC, the nuns asked (or rather sang), “How do you solve a problem like Maria?” For the past couple years, the leaders of Europe have been asking, “How do you solve a problem like over-indebtedness?” So far, the debate has been framed as a choice between growth or austerity, according to the BBC. As the biggest member of the euro zone, Germany has been aggressive in acting as the enforcer of the austerity route for its weaker sister countries. Greece, for example, had to agree to major austerity measures in return for bailout money. The result? The economy hasn’t improved and the people are revolting.

Countries in favor of austerity believe spending cuts and general belt tightening are the ticket to lower budget deficits. The growth camp favors more government spending on things like infrastructure and energy technology as a way to create more jobs and help a country grow its way out of its debt problem.

Recently, with the election of Francois Hollande in France, and the popular support of Alexis Tsipras in Greece ahead of the upcoming Greek election, the support for austerity is starting to fade and is being replaced by a growth agenda, according to BusinessWeek. Germany, however, remains firmly in the austerity camp.

But, here’s a question, “Can we have austerity and growth?”

As complicated as our world is, the debate between austerity and growth might be a false choice so says Christine Lagarde, head of the International Monetary Fund, according to the BBC. She and others argue that given the precarious state of some countries, a two-pronged approach might be needed. First, spend more in the short-term to stabilize the economy, then gradually tighten the belt down the road when the economy is better able to handle it.

In theory, that sounds like a less painful way to solve the deficit conundrum. In reality, it may not be that easy.

For years, countries such as Greece and, yes, even the U.S., have lived on borrowed money and borrowed time. It appears the bill for this “living beyond your means” spending is coming due sooner rather than later as evidenced by the continuing economic stagnation in many countries.

While one can hope the politicians and economists will come up with a plan to steady the ship, we can’t bank on it. We have a responsibility to you, as our client, to help you meet your objectives regardless of what happens in Washington or Athens or Berlin. And, we take the responsibility very seriously. 
 

Weekly Focus – Think About It…

“When asked in surveys, most Americans believe that spending money on personal desires brings greater satisfaction than giving it away. But, when participants actually were given the chance to do that, to spend $20 on themselves or give it away, it was the act of generosity that led to greater happiness. To care is good.”

--Dacher Keltner, professor of psychology at the University of California-Berkeley, commencement address at UC-Berkeley on May 14, 2012

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