4th Quarter 2011 and Year End Commentary

Posted on Monday, January 30th, 2012

Investments and Markets

What started as a promising year in the markets turned negative after June, weighed down by the news from Europe and the political rancor here in the U.S.  It felt like a mini-2008 as European credit concerns began to bleed over to the U.S.  Volatility levels increased dramatically, and it squeezed out the less-than-committed investors, pushing markets dramatically lower in the fall, only to recover by year-end.  The U.S. markets ended the year virtually flat while international markets ended in negative territory.  Year-end and 3-year market data are listed below.

Q4 2011 Year-to-Date Last 3 Years*
90-Day US Treasury (T-Bills) 0.00% 0.06% 0.12%
BarCap Interm US Govt/Cr (Bonds) 0.84% 5.80% 5.65%
S&P 500 (US Large Cap) 11.82% 2.11% 14.11%
Russell 2000 (US Small Cap) 15.47% -4.18% 15.63%
MSCI EAFE (International) 3.33% -12.14% 7.65%
US REITS (Real Estate) 15.36% 9.37% 21.63%

Despite the seemingly “different this time” feel to the economy and politics, the markets tell a different story.  Markets are up dramatically from 3 years ago, and up even more from the market bottom of March 2009 (S&P 500 and MSCI EAFE are up 95% and 65% respectively).  Market recoveries are never smooth and easy, and this one is no exception.  But markets continue to inform us that this recovery is in-line with historical standards.


Debt and deficits, here and abroad, continue to dominate the news.  And they should.  Sovereigns continue delay tactics, but the issues are complicated and will take time.

The euro crisis is just a symptom of the larger European debt problem.  We become increasingly doubtful that the euro will survive in its current form, and we’re not sure it should.  Managing different economies with a monolithic currency is impractical at best, and so is structuring a more consolidated political and economic system that would be required for the euro to survive in its current form.  Can you imagine German, French, Italian, et.al. electorates ignoring their cultural differences in favor of more political and economic consolidation?  We don’t think so.

The European currency and credit issues will not be solved soon.  Some European countries will choose devaluation/default over austere economic policies, and maybe they should (think Greece).  Those decisions will force changes in the euro, but we don’t subscribe to the “survive or collapse” scenario.  We believe that there is a managed middle course where some type of hybrid euro will emerge in time.   But it WILL take time.

And the U.S.?  We spend over $1,000,000,000,000 (that’s $1 trillion) more than our $2.3 trillion of tax revenue.  Spending 40% more than our tax revenue is not sustainable, and there isn’t enough tax revenue to make it so. We haven’t shown the political resolve to change, because markets have given us a pass, focusing on Europe instead.  But this will end in time, and we will either choose to modify entitlements or face higher taxes and interest rates/inflation if we don’t act soon.  We have some time, but not much.


Buckle up, because U.S. politics will become even more intense as we make emotionally charged choices.  Last year at this time, we said that the rancor was just beginning, but we underestimated the level.  This year will be no different as the country makes key policy decisions that go to the very heart of the country’s core values.

Despite the divisive issues, we continue to have confidence in the process, recognizing that like the markets, it’s never smooth.  Our country has survived and moved beyond times more intense than these, and there’s no reason to believe this tine should be different.


We continue to hear from our clients that they’re concerned about the very sustainability of markets, economies and political systems.  We understand the “it’s different this time” feeling, but we respectfully disagree.  Why?  Because it’s always “different this time.”

We still have confidence in our political and economic systems.  Not because they’re perfect, but because they’re better…much better than the command-and-control alternatives.  The wisdom of the many far exceeds the intelligence of the few, and our political and economic systems still are based on this core belief.

When you’re on the front lines, sometimes it’s hard to get the perspective necessary to believe that it’s really getting better.  But it is.  Markets lead, not follow, and markets are telling us that we’re making progress.

And we are.

Best regards –

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