2011Dec12 Santa, please...

  Hasn’t every investor been hoping Santa Claus would come a little early this year?  After the Thanksgiving holiday, markets surged briefly on news that the world’s central banks were banding together to make emergency funding available to Europe’s troubled banks. The stock market enjoyed a few of its best days in years!  Unfortunately, days do not make a market.  

After a month of high volatility that has kept investors on edge, it seemed that a welcome respite was happening, and the world as we know it wasn’t ending.

The chart shows sixteen swings of 5% or greater in two months. Normally, market moves of this magnitude occurred once a year in the 90s. Rumors of rumors have resulted in a schizophrenic market without creating any sustainable trend. The coordinated action by the Fed, the European Central Bank, the Bank of England, the Bank of Canada and the Bank of Japan should mean that another 2008 “Lehman Brothers” event is unlikely.

The coordinated action does not address the excessive government debts that led to this crisis in the first place.  Italy still has debts in excess of 120% of GDP. The rest of the Euro zone is not far behind.  As in our country, policy wonks suggest that Europe can grow out of its problems with proper free-market reforms. We disagree.  Aging demographic trends in most of the Euro zone make the fast-growth of the post-World-War-II era virtually impossible. 

Europe is struggling through the death throws of socialism. It has run out of other people’s money. Now, its leaders and citizens have very difficult choices to make—such as whether or not a unified Europe is beneficial to all parties.  It is no longer a question of affordability. They are out of money! The leaders must convince the citizens that the change is not a choice while they justify being re-elected.

Whether political or economic, uncertainty abounds, and markets hate uncertainty.  We must expect more choppiness in the short run.  We hope for the best, but must prepare for the worst.  

Regardless of what happens in the European sovereign debt and bank crisis, life will go on.  European states have defaulted on debts numerous times over the centuries.  The cycle of debt and default is, for better or worse, part of the rhythm of economic history.  As investors, we simply have to be smart about how we allocate our funds, and know surprises will still occur from the unexpected.