“Gratitude is the sign of noble souls.” — Aesop
To begin, our deepest gratitude and thanks from everyone at BSW to our clients, colleagues, and friends – it is a rare privilege to work with such truly outstanding people.
In the hustle, bustle and rush of the holiday season, it is often difficult (yet so very valuable) to maintain our perspective regarding the full richness of our lives. So to put things in context, reflect for a moment that the US’ 316 million citizens account for just 4.5% of the worldwide population of 7 billion people. Of those 316 million US citizens, roughly 5% have a net worth that exceeds $1 million. This translates to just two-tenths of one percent of the worldwide population, or one out of every 14 million people. We are indeed fortunate.
So in the coming weeks, let us strive to maintain an “attitude of gratitude” as we tend to the comings and goings of life. While navigating the holiday crowds, let us be grateful for the wonderful food and comforts for which we have both the access and means to enjoy; as we queue up for the poking, prodding, and herding of airport security, let us be grateful for the privilege of safe and speedy travel; and, finally, as we take stock of 2012 and look forward to 2013, let us be grateful for our precious lives – whose fleeting nature was underscored by last week’s tragic events in Connecticut – and the people who make these lives so special.
2012 Economic Commentary & 2013 Outlook
At the outset of 2012, we identified three key risks that global markets would need to contend with: 1) Europe; 2) US Fiscal Cliff; and 3) China. First, the Eurozone debt and banking crisis risked derailing the still-fledgling global economic recovery. Second, an inability of US legislators to meaningfully address the US fiscal cliff risked plunging the US (and the world) back into recession. Lastly, China risked a “hard landing” from slowing growth coupled with an important, once-in-a-decade leadership transition.
On the eve of 2013, while the US fiscal cliff risk continues to linger, the risk posed by Europe and China have somewhat abated. The European Troika (the European Central Bank, the European Commission, and the International Monetary Fund) successfully implemented an alphabet soup of programs designed to backstop individual countries, most notably through OMT (Outright Monetary Transactions), which is essentially a fancy way to say printing unlimited amounts of money to buy an unlimited amount of sovereign debt. And, just recently, Greek debt was just upgraded by six notches to a B-rating — a tremendous improvement.
In this manner, the Troika has lifted a page from the US Federal Reserve’s playbook, as our own central bank just recently announced another round of Treasury buying to replace Operation Twist that will add roughly another $550 billion of debt to the Fed’s already gargantuan balance sheet. Between the Troika and the Fed, there is no doubt that we are living in the midst of the greatest monetary “experiment” in history. Thus far, the experiment has created a floor on downside risk – but has yet to create a self-sustained recovery or meaningful improvements in employment.
Meanwhile, China appears to have negotiated a “soft landing” and a functional, if uninspiring, status-quo leadership transition. Its economic indicators show marked improvement and China still has considerable latitude on a policy front. The country is no doubt slowing as it transitions from an export- and capital spending-driven economy to domestic consumption, but a more sustainable 6% to 7% growth trajectory now appears quite feasible.
Continuing with our theme of gratitude, in 2012 the global economy (and investors) caught a very lucky break. Any one of the three risk outlined above could have torpedoed markets – but they didn’t. So as we look ahead to 2013, while it is certainly critical to identify potential storm clouds on the horizon and what could go wrong, we also want to emphasize what could go right instead.
What Could Go Wrong:
- US Fiscal Cliff: a failure on this front could shave as much as 4% off of US GDP, plunging the US back into recession – along with the rest of the world.
- Paradox of Thrift: President Obama’s reelection increases the probability that Fed Chairman Bernanke will hold rates lower for longer, continuing a policy a financial repression that may actually be undermining growth. When all you have is a hammer, everything looks like a nail.
- Eurozone: the PIGS are still broke and austerity-induced unrest could unravel whatever consensus exists as leaders become tired of dealing with a slow burning crisis that will require many years to be resolved.
What Could Go Right:
- US Fiscal Cliff: angst over the fiscal cliff is acting as a huge wet blanket on the economy, markets, and investors. Although the cost of the expiration of the Bush Tax Cuts is widely known ($600 billion), BSW is convinced the “uncertainty tax” is orders of magnitude larger – and causing uncertain businesses to defer hiring, individuals to defer capital expenditures, and investors to stay on the sidelines. Based upon a variety of measures, investment markets appear to be a coiled spring, so successfully implementing a framework to address the US debt and providing a measure of certainty, even if it is not the fabled “grand compromise,” could enable both markets and the economy to make sustained forward progress.
- US Housing & US Energy: the unsung heroes of 2012 are housing and energy. The US housing market is showing signs of renewed life and stability, while the US is quietly on track to become the world’s largest oil producer within a few years and energy-independent within one or two decades. These two factors have profound implications for US growth, US debt (energy is the US’ largest negative in balance of trade), and local/state/federal tax receipts.
- Fed Policy Exit Strategy: If US can continue to muddle through and find viable footing, the Fed may be able to articulate a credible exit strategy from the aforementioned greatest monetary experiment in history. Doing so would allow the bond market to slowly digest rising rates and avoid the dangers from rapid inflation and an erosion in bond values.
We hope this Commentary & Outlook provides you with better insight into your BSW Growth Portfolio and our 2013 economic and investment outlook. If you would like to discuss these positions or your portfolio in greater detail, please don’t hesitate to contact BSW. As always, we are happy to help.
Finally, as a reward for reading to the end of this post, please treat yourself to this excellent video montage of Alan Watts (here or click on photo below) on this post’s theme of Gratitude, as well as this wonderful and timely essay (here) by “Story of Stuff” author Annie Leonard – Happy Holidays and best regards!
–David Wolf, Chief Investment Officer