“This too shall pass.”
--Ancient proverb
Like getting emotionally involved with your favorite sports
team, it’s easy to get caught up in the drama surrounding the fiscal cliff. Combining
politics, money, power, gamesmanship, and national impact makes for a
compelling story line. But you know what? “This too shall pass.”
As Reuters reported, “One way or another, Washington will
come to an agreement to offset some effects of the cliff. The result will not
be entirely satisfying, but it will be enough to satisfy investors.” Unfortunately, we have to go through a totally
avoidable wailing and gnashing of teeth before we get the Democrats and
Republicans to do what ordinary Americans do when faced with opposing
issues—compromise.
Up until last week, the stock market seemed undeterred by
the circus in Washington. However, as it became clear that a deal would come
down to the wire, investors got nervous and stocks experienced five days of
declining prices.
Unfortunately, this partisan bickering could create an
unintended consequence.
Back in 2011, wrangling over the debt ceiling triggered the
first-ever U.S. credit downgrade. Even though the debt ceiling was raised and
the U.S. did not default, credit ratings agency Standard & Poor's nonetheless
lowered the U.S. credit rating stating, “the effectiveness, stability, and
predictability of American policymaking and political institutions have
weakened at a time of ongoing fiscal and economic challenges.” If the continued
discord in Washington leads to another downgrade, it would not be good for the
financial markets, according to Jonathan Golub, chief U.S. equity strategist at
UBS Equity Research.
Outside of the fiscal cliff, one thing we know for sure will pass this week is the end of one year and the beginning of a new one. And to that we say...may the New Year bring you health, happiness, and family closeness.
NORTH DAKOTA IS A SHINING EXAMPLE of
why things are not always what they seem.
Back in 2009, PIMCO coined the term, “New Normal” to reflect
their view that the U.S. had entered a multi-year period of balance sheet
de-levering and restructuring that would stunt economic growth and keep stock
market returns low. So far, they’re half right. Economic growth has been
moderate as predicted but the stock market has performed well since the
beginning of 2009 as it bounced off the bear market lows.
Implicit in PIMCO’s view is the idea that economic growth
comes from three factors.
1)
Growth in the workforce
(demographics is key)
2)
Growth in productivity (helped by
improvements in technology)
3)
Growth in physical capital (e.g.,
plant, equipment, machinery)
Source: University of Colorado
Here’s where it gets tricky—trying to predict changes in those three variables is not easy.
For example, let’s turn the clock back to July 1, 2011. On
that day, if we asked you to guess which state would have the highest
percentage growth in population over the next 12 months, what would you have
answered? Would North Dakota have come to mind? Probably not, yet, the Census
Bureau recently reported The Peace Garden State topped the list in the past
year.
This achievement is even more remarkable considering North
Dakota was only the 37th fastest grower between 2000 and 2010. In
other words, it essentially came out of nowhere to become a fast grower all
thanks to new technology which enabled the rapid development of an oil- and
gas-rich shale formation.
Today, fiscal cliff issues, massive deficits, unsustainable
government spending, Eurozone problems, and the Middle East powder keg are just
a few of the many reasons to be negative on the markets and the economy. Yet,
we need to remember North Dakota.
Nobody knows where the next “North Dakota” will come from,
but it will likely come. So, while things may be tense in the markets and the
economy, chances are our American ingenuity will rise to the occasion and
eventually restore us to a position of economic strength.
As that unfolds in 2013 and beyond, we’ll keep doing what we
do which is manage your investments according to your goals and doing our best
to achieve solid risk-adjusted returns.
Weekly Focus – Think About It…
“Year's end is
neither an end nor a beginning but a going on, with all the wisdom that
experience can instill in us. Cheers to a new year and another chance for us to
get it right.”
-- Oprah Winfrey, talk show host,
media mogul.
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