Pacific Wealth Management has maintained a conservative posture to our portfolios this year as an extraordinarily long list of complex challenges continue to increase the probability of financial market volatility. The United States, Europe and Japan’s policy response to these challenges, and resulting tepid global economy, is focused on a strategy of government bond purchase programs to artificially manipulate the bond markets and lower interest rates.
While Europe slides deeper into recession, the United States is growing at a slow pace. U.S. stock markets began to rally and move higher over the summer as we received confirmation of our slowing domestic economy. Although counterintuitive, the slowdown in the American economy increased the likelihood U.S. Federal Reserve Bank Chairman, Ben Bernanke, would begin another round of U.S. Government bond purchases to keep interest rates low. Unfortunately, the likelihood more “Quantitative Easing” will improve our economy and reduce unemployment is suspect, as recent efforts have had little long term positive impact. Last week, Mr. Bernanke announced his latest round of mortgage-backed-securities and Treasury bond purchases, we are now describing as “QE Forever”. Additionally, he suggested the central bank would keep their 0% interest rate policy in place through mid-2015. With Washington unable to offer any legislative help, while mired in stifling partisan politics, it is ironic our central bank is now left in an attempt to stimulate the building and construction industry, whose excesses were primary contributors to America’s persistent economic doldrums. Meanwhile, we continue seeing healthy investment returns from the stock, bond and gold components of our portfolios.
The U.S. economy’s ability to continue growing in 2013, albeit tepidly, will partly depend on Washington’s willingness to allow the expiration of the Bush tax cuts at year end (therefore, effectively raising present tax rates). The financial markets are relying on Congress to avoid the “Fiscal Cliff” by delaying across-the-board spending cuts and extending most of the present tax rates in order to avoid what would likely be an inevitable recession next year. Dallas Fed President, Richard Fisher, recently commented “I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors. But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors.”
As most of the world’s Central Banks continue borrowing more money to solve the global banking crisis, which originated because of too much debt, countries will ultimately reach a point where the total amount owed becomes so large that servicing that debt becomes prohibitive. Today, Southern Europe is peering over the wall at that very real problem while the United States’ challenges will certainly get more complicated as we head down this same road.