Familiar pattern

The pattern is strangely familiar. Investors at the beginning of the year start to believe that the page is turning; that we are at a watershed, one filled with opportunities, hoping that the European economic troubles can be resolved, and that the United States’ debt and budget problems somehow can be dealt with successfully.

The recent Eurozone “make and mend” moves appear to work temporarily but they do not seem to be sustainable. The economic recovery in the United States clearly is underway, but the underpinnings provoke a great deal of scepticism.

The current rally in the stock market began about a year ago. Much of its impetus came from the trillions of euros provided by the European central bank to the banking system, particularly Greece, Italy and Spain. While many of the world’s stock markets have been on a tear, that has not entailed a similar move by European and Japanese equities.

In many ways the ongoing debt crisis confronts investors with a recurring problem. They are searching for yields. Investors have retreated to the safety of bonds, and for some strange reason, to the U.S. dollar. Why anyone would invest in the U.S. dollar and government bonds yielding so little is puzzling to say the least. Warren Buffet, the legendary billionaire investor, recently characterized such government bonds as the worst investment in the world.

All but ignored is the problem of insolvency, and the continuing need for more government injections of stimulus. Buffet stated that this situation will be handled just as the case previously, by the government printing more money.

Europe’s leaders have spent much of the past year trying to patch up Greece’s horrendous difficulties, which certainly must end in bankruptcy.

Other nations, however, have failed to generate the kind of economic growth that would justify optimism or the current levels of the stock market. It should be noted that the four-year-old economic recovery is getting old and is lasting as long as the average economic upswing.

Corporate profits have held up very well, and that has been a sustaining factor in the equity markets, but real wages have not been rising, and that hampers consumer demand that soon will turn more sluggish.

A repeated program of more government stimulus may indeed be forthcoming. If that were the path to prosperity, we should be moving to Zimbabwe, which for decades has been pursuing that path.

The 1929 Great Depression took four years to turn around, so our economy clearly needs more time to recuperate.



Bruce Whitestone