The world’s banking and currency system is currently under a high level of scrutiny. This retrospection is at its highest in Europe. The sustainability of the European Currency Unit (ECU) in its current form is under question. This is a serious question – and one that needs to be answered. Greece, Portugal and Ireland have struggled and will continue to experience issues. We currently fail to see serious viable systemic risks present in Italy and Spain. However, in certain circumstances, governments are “running out of other peoples’ money to spend.” The world’s investors are showing concern about the sustainability of today’s governmental social contracts in certain cases.
The developed world’s citizens are attempting to answer the question – what do we expect from our governments? This question is serious and the debate, elections and actions surrounding this question are at times violent and unpleasant. But this process is necessary. We have long stated that the way democracies answer serious systemic questions involves three episodes. These three episodes are shock, discovery and solution. We believe the world has entered the third stage of this episodic series.
Prior to discussing the world’s “balance sheet” problems, a quick update on our second half economic/capital market outlook is appropriate.
National Income Statement Items
National and Worldwide Balance Sheet Items
Govt Budget Deficit as % of GDP -
Govt Debt as % of GDP -
Where are the bond-market vigilantes going to hit next? Is the focus going to be maintained on Italy? We believe, while that is the operative question of the day, it is not the operative question that needs to be answered for the long-term.
Getting Back to Business – Asia and Other Thoughts
We believe the world’s economies have entered into a period where, from a short-term standpoint, growth should accelerate in Japan and the U.S. Europe is struggling not with “income statement” issues – per se – rather Europe is struggling with “balance sheet” problems which have the capability of impacting “income statement” items by negatively impacting confidence. We expect to see slower-than-normal growth in most of the world’s developed economies as the last half of 2011 continues and we head into 2012. With this view, we expect interest rates to remain subdued, inflation to remain tame and corporate profit growth rates to start receding.
On cue, the world’s investors started shifting focus on the world’s “balance sheet” problems. Most major western societies are attempting to answer the question – what do we expect and demand from our governments? This process is not new and has been ongoing in the United States since 1776. However, this episode of the debate is serious and mature. Serious and thinking people have come to the conclusion that, as Milton Friedman stated – “there is no such thing as a free lunch.” People in Europe and the U.S. are actively debating the social and economic role of government. As was stated above, we believe this process is the third - and potentially the final - episode of this serious series.
This is not to say that “all is well.” Indeed, the western world is facing an income statement/balance sheet dislocation which is highly serious. This dislocation has led, and in our opinion will continue to lead, to a high level of volatility – in both the financial markets and in political circles. That being said, we sense the world’s investors and people will address the questions which need to be answered. As this economic drama continues to unfold, we believe significant opportunities will present themselves. We urge investors to remain vigilant during this volatile period, seeking opportunities which occur on a worldwide scale.
William B. Greiner, CFA
President and Chief Investment Officer
Lead Manager - Scout Global Equity Fund