Up Year, down quarter
Q2 2012 has been filled with downs and ups. The volatility of EURO /Banking /Government debt crisis has returned to the market like a summer ritual. The numbers year to date are actually quite good. The Global Index MXWO:IND is up 4.49%, while the US markets are up 8.31% SPX:IND.
The markets remain very nervous and each day seems to have mass psychology that oscillates like the weather. Equity portfolios are being rocked by daily moves driven by relief that the financial crisis that began five years ago is receding. The next day there has often been mass fear that the crisis is nowhere near complete and we are headed back to the lows of 2009.
Each political announcement, earnings report, CPI and jobs number seems to be the precursor of a massive change. The last day of the quarter is a great representation of this dynamic as a major announcement regarding EURO banking goosed markets up globally by two to three percent.
As the second half 2012 now unfolds, there will be great focus on the Presidential election in the US and in the battle for control of the Senate. There is a significant fear in the markets of the expiration of numerous temporary fiscal measures at the end of the year. The “Bush Tax Cuts” are due to expire along with extended unemployment benefits and payroll tax reductions. This is known as the “Fiscal Cliff” and it is not pretty.
The political atmosphere in the United States grows more polarized and toxic. A serious negotiation of our three main (Medicare, Military and Social Security) Federal Spending columns is inevitable. The numbers are overwhelming and I dearly hope that there can be a moment that transcends ideology after the elections where an honest negotiation will take place.
It seems obvious that the American People are waiting for leadership on the massive issues that plague our spending and pathetically complex tax code. Many that I speak with on this issue are cynical and expect only further mediocrity and worse to come from leadership at the Federal level. I am optimistic that the financial problems of the country are manageable and when the real solutions come forth, the public will be ready to sacrifice in exchange for growth and a path forward.
The markets are likely to break out to the upside if and when this occurs. The scenario of decline and perpetual contraction of the American economy is one that I do not subscribe to.
Greek Yogurt
With the fatigue of a slow motion bankruptcy in the cradle of modern democracy, I look to the positive story of Chobani Greek Yogurt. The company now has fifteen percent of the US market for yogurt, from almost nothing back in 2007. Greek yogurt is a new category in the US market. Chobani is a truly inspirational story of a Turkish immigrant creating a company that now approaches almost $1B in sales from nothing. See http://online.wsj.com/article/SB10001424052702303379204577476974123310582.html?KEYWORDS=chobani+yogurt for a Wall Street Journal piece on this inspiring story.
This is how we grow. The future will present things that do not even exist. From Google, to I Phones and new opportunities that are now not even imagined. The United States remains a land of opportunity, challenges of debt, 12 years of Afghanistan, etc notwithstanding.
The pessimism of our great challenges of the aging of the baby boom generation, massive federal debt and ever broadening political divide will be overcome by the human spirit of innovation. Just as America has grappled with Communism, Civil Rights, Vietnam and so many other challenges, there will be adaptation and innovation in the pursuit of solutions to today’s challenges.
I spend a lot of time these days in discussion with clients and friends about the perspective of history and how the times that you live in seem so much more dramatic as they are happening. Looking through a broad historical tunnel, WWII, The Cold War, The Cuban Missile Crisis and so many other dramatic historical events seem much less daunting with the passage of time. Today’s problems are serious, but no more so than those of the past. There is no plague, no food blight or other catastrophic wave that will not be either solved or adapted by mankind.
Still talking Nat Gas
American energy abundance is a phenomenon that I seem to read about every day. I just cannot stop thinking that we are emerging from the era of dependence on foreign petroleum and what that can mean for growth. Just today (7-1-12), in the New York Times, Thomas Friedman writes, “Our newfound natural gas bounty can give us long-term access to cheap, cleaner energy and, combined with advances in robotics and software, is already bringing blue-collar manufacturing back to America.” See the entire piece at http://www.nytimes.com/2012/07/01/opinion/sunday/taking-one-for-the-country.html
Energy is a incredible story of the changing structure of the challenges we face and how changes that are difficult to anticipate can drastically alter future scenarios.
A powerful argument can be made that the Iraq war was significantly motivated by the vast oil reserves of the region. It is a very sad concept to contemplate, particularly for those soldiers and Iraqi citizens most directly impacted by the US military actions taken in Iraq. What will future generations of Americans think when they study these recent events?
I hope that there will soon be an America that leads through innovation. New means on extraction of energy sources based on technological innovation that aims for clean and sustainable domestic resources rather that the fossil fuels of the past. From the Telephone to the Space Shuttle, the Ford Model T to the Internet, I firmly believe that the road to a great American and Global future will be based on innovation and not military action.
One can only offer wild guesses and never predictions of what the future innovations will be. Algae or solar based energy, ultra high power computer processing power combined with 3D printing, universal connectivity all hold promise to move us all forward. This progress is mostly based on education and knowledge. Those that participated in the industrial boom of the 20th century without advanced education will not see a counterpart in the digital and fast moving world that we are now at the dawn of.
The adaptation of our educational system will likely be the most important challenge of all that we face. For it is through knowledge and invention that the future will be cast.
No Interest No Peace?
According to The Economist , June 30-July 6 2012 (page 26), “History suggests that investing at the current low level of Treasury yields is a very bad option” Investors are being presented with an environment of low to even negative interest rates. This is a rare scenario that has historically resulted in equity markets producing significant results. As the article goes on to document, there is strong historical precedent that shows equity returns to be above average when starting from ultra low interest rate scenarios.
Over the last few years I have advised clients during review that the notion of fixed income is seriously limited by today’s rates that are near zero in most cases. This investment landscape has what I feel is a “postwar” dynamic. I wish we were actually post Afghanistan, but what we see is massive government debts that have built up over the last few decades.
Much of this debt is related to the demographic dynamics of the Baby Boom in the US and the post WWII welfare state that have evolved in Europe. Post WWII there were high levels of government debt, of course that was a much different environment. Despite the massive differences between now and post 1945, there may be a great chance for equities to produce gains as we seek a recovery from over eleven years after the tragedy of 9/11.
For perspective, I have been reading a wonderful book, Eisenhower in War and Peace by Jean Edward Smith. It is inspirational to learn of Ike’s life and times, from after WWI to years of peace after Korea.
There were many great challenges of Eisenhower era, WWII being the cornerstone of human triumph over evil. Our problems of today seem to be less overwhelming when we look back. I long for a strong America, but I do feel that this era of endless war has led us down a path in great need of new direction. As Ike said,
“Every gun that is made, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and not clothed.”
“I hate war as only a soldier who has lived it can, only as one who has seen its brutality, its futility, its stupidity.