With the holidays upon us and 2012 right around the corner we hope you are doing well and able to share this special time of the year with family and friends.
The volatility that began over the summer is continuing as stocks around the world remain held hostage to the news of the day coming from Europe and Washington D.C. The European Debt Crisis has been at the forefront over the last few months. These problems are not new and, unfortunately, getting worse. We, at Pacific Wealth Management, remain concerned the entire Eurozone may experience a financial crisis similar to the Lehman Brothers bankruptcy-induced banking crisis of 2008. What is ultimately at stake is the integrity of the Euro Banking system and the issue of liquidity vs. solvency for a growing number of countries throughout Europe. At a minimum, we believe the EU will not look the same a year or two from now.
The European leadership, and especially Germany’s Angela Merkel, is not willing to give the European Common Bank (ECB) the authority to print money and create a backstop for, not only the Greece, Portugal and Irelands of the world, but now Italy and Spain too. The estimated size of the fund needed to provide that much-needed backstop range from €2 Trillion to €6 Trillion. Germany continues to have nightmares of the uber-inflation their country experienced in the 1920’s, which ultimately brought Hitler to power, and is adamantly opposed to the ECB printing an endless supply of €uros to support their weaker brethren. With this week’s announcement the world’s major Central Banks will provide $U.S. loans to European banks, the global stock markets rallied dramatically. Despite this news, Germany has yet to reach a resolution and we feel Europe is likely to deteriorate further before it improves. European bond investors are driving yields on Italian and Spanish bonds higher and creating more challenges to an already fragile European economy. The essential question remains whether the debt problems and upcoming recession in Europe will torpedo a tenuous U.S. economic recovery.
The U.S. economy has recently picked up a little strength over the last couple of months. Unfortunately, our politicians are not inspiring investor’s confidence either. The failure of the Super Committee, once again, clearly illustrates the dysfunction among our political leadership in Washington. We do not expect much to be accomplished on the deficit reduction front before the seating of the 2013 congress.
Our Pacific Wealth Management portfolios remain conservatively invested and consistently focused on wealth preservation. We Americans are an optimistic group and this time of the calendar is usually conducive to better than average stock market returns as we look forward to another new year. We do believe stocks have a reasonable likelihood of experiencing an end of the year “Santa Claus” rally. Unfortunately the uncertain outlook existing today on the economic and political front will soon reemerge as we head further into 2012 and with it, more roller coaster rides in our future.