“In rare instances, men taking VIAGRA reported a sudden decrease or loss of vision. If you experience sudden decrease or loss of vision, stop taking VIAGRA and call a doctor right away.
I read things like the above and think, “there may be certain immediate benefits from taking Viagra, but you might go blind.” The nuns were right after all!
There are real consequences to monetary and fiscal policy, and not all of them are immediate. The effects of profligate government spending and profligate consumer borrowing remain with us. Globally, Europe’s ongoing car wreck, as successive economies break down, is evidence of lingering issues related to the economic crisis that began here. In 2008, we wrote that the ripples of the US crisis would continue for years. They are continuing.
The complacent thinking that each of these economic crises will be handled in order and without significant consequence strikes us as absurd and irresponsible. European regulators continue to take a reactive approach to Greece, Ireland, now Portugal, and very soon Spain. They are missing a crucial opportunity to take pre-emptive action whereby they can preserve their options. We have been raising this alarm for several weeks. Greece, Ireland and Portugal are relatively manageable problems, but Spain is huge. Please, Mr. Trichet and Madam Merkel, have a double espresso and wake up!
Domestically, we are not optimistic about the deficit commission getting the 14 votes required to bring their recommendations to Congress. In addition, it is looking more and more likely that the Bush tax cuts will be extended across all income levels. These developments not only put pressure on near term budget deficits, but they also fail to address the problem of long-term structural deficits.
Before the most recent problems resurfaced in Europe, we began to see longer-dated Treasury yields back up in response to the failure to address the budget deficits in the US. Since the Irish crisis developed, however, money has poured back into Treasuries, bringing yields back down. It could be argued, therefore, that in the absence of renewed pressure in Europe, bond yields would be materially higher right now. This is the scenario we see playing out next year.
We believe that, ultimately, Germany will succumb to pressure and agree to massive support for the suffering fringe European economies. Painful austerity measures will likely be implemented across the continent, but some semblance of order will be restored to the sovereign debt markets in Europe. However, this means that investors may be less inclined to buy the relative safety of US Treasuries. Therefore, we see longer-term bond yields rising and the yield curve steepening in the US next year. This will pose problems for the housing market (mortgage rates) and the economic recovery at large.
The week of November 15th marked the end of 99 straight weeks of net inflows in bond funds. Individual investors are chronic worshipers at the alter of “what’s working now.” As stocks flailed and bonds rallied, Fred and Ethel Everyman ran to the other side of the boat. If you consider the consequences or side effects of all of the above and higher rates in the future, you will surely seek opportunity elsewhere.
We see opportunity in large-cap multinational companies, where balance sheets are generally in great shape in contrast to consumers and governments. Moreover, lprice-to-earnings ratios are at historically average levels and dividends are pretty generous. This is a time where huge infusions of short-term government money distort normal readings of data. Focus on long-term trends, valuations and policy issues. Don’t rush blindly to the other side of the boat. Average investors tend to race to whatever has already worked. Don’t get caught among their number. Don’t lose heart; there is money to be made out there!