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New York, January 17, 2013 Advisor Update®
New Year’s Edition
2012 was another strange year for rates, credit, and risk markets—the best explanation for this is the historic alignment by the “Big Three” (US, EU, Japan) central banks to manipulate rates and liquidity conditions. The upshot is that some global equity sectors and regions performed well with only the benefit of massive easing, with little fundamental underpinning. We will provide a detailed review of 2012 in our Portfolio Update® and our Quarterly Webinar (see accompanying email to sign up), and instead focus here on our outlook for the rest of 2013.
There will be much discussion in 2013 on the US debt ceiling and deficit, global climate issues, the continuing crisis in the EU and whether Lance Armstrong actually confessed. All but the latter are grounded in a simple historical and economic fact that politicians, particularly in the US, continue to ignore: the US and other developed countries have not produced sufficient growth and innovation to keep up with rapidly growing emerging economies. This has been a major factor in the developed world’s relative economic underperformance in recent decades.
Politicians (and their lapdogs in the media) obfuscate by calling China a currency manipulator; they convince voters that discretionary spending cuts (Republicans) and tax hikes (Democrats), as opposed to meaningful Entitlement reform, will make US competitive again; and finally, they fail to create policies to improve K-12 education (like giving the private sector and not teachers unions a shot at fixing it) and immigration (why aren’t we recruiting the best foreign students, who are studying at our great Universities, to stay here?)
Obama and the Republicans can stick their heads in the sand all they want, but the real task ahead of the US (as well as EU countries and Japan) is to figure out how to compete with, service, and supply those fast growing countries, particularly in Asia. China, Malaysia, Singapore, Taiwan, Indonesia, South Korea and Hong Kong have all made huge investments in infrastructure and education in the last fifteen years and the result is GDP growth well above developed countries.
What could go wrong? Going into last year we thought the largest risk was the EU imploding and a rocky political regime change in China. Ultimately, ECB Chairman Mario Draghi bought the EU time to address their fiscal and banking crises and China struggled but managed to avoid a “hard landing” (their economy still grew 7.5%). In 2013, there seems to be a short term risk that the US politicians will top their August 2011 shenanigans. If we determine they will do their worst and risk derailing the fragile recovery the US has cobbled together since 2008, then we will proactively reduce risk in front of it. The best guess here is that there will be smoke and even fire, then the sound of another can rattling down the road.
As we look at investing in 2013, the global macro environment remains similar to last year in that most developed countries everywhere are in a battle to produce growth in a time of private sector deleveraging. This means that government bonds in those countries will most likely be range bound, producing low yields for the risk and negligible absolute returns.
Finally, if you are a credit fundamentalist, as we are, you do worry that financial conditions are too accommodative. This may not be the year when central bank policy finally crushes government bond prices, but that day is coming. We worry that the system that produced bubbles in internet stocks and houses has brewed one for bonds.
We look forward to meeting with many of our Advisors and Reps in 2013. The Global Tactical Allocation portfolios are an excellent “core” holding of client assets because of the focus on solid returns with proper risk management. Additionally, our Collective Investment Fund is an ideal QDIA and core option in your Retirement Plan lineup. Let’s have a great 2013 together!
John Forlines III & Court Hoover