Friday, December 30, 2011

The Year of 2012 AD:The Year of Investor Uncertainty

As we move into 2012, the Euro crisis is paramount in the minds for many investors.  It is having a long reaching impact with various economies. Countries that are holding large amounts of bonds, for example Italy, have deep concerns for the year 2012 with its exposure to the Euro Crisis. It has a current impact with investors here in the US also, as banks are seeking spots to invest money while there is market uncertainty here in the US.  Europe is not the only place that is facing tough times ahead. There are many other concerns also right here in the US. The US Dollar is in decline, stocks are flat, Real Estate is still in a state of correction, lastly there are commodities on the rise. All things to review if one is serious about investing in 2012.

Along with the Euro, the US dollar is a downward march. The devaluation of the US dollar is always relative to another currency, but this still is a concern. The US currently economy is not suffering from the issues that are talking place in Europe or in Greece, but we are gradually moving in that direction. The Federal Reserve is keeping interest rates low, purchasing US Treasuries. Let us not forget the Federal Government's implementation of a over a $1 trillion dollar stimulus package, Obamacare, various bailouts, TARP, and various expansionist spending programs are not helping in the dollar's cause for strength.  Typically the objective with expansionist spending policies implemented by the Federal Government is to move the Aggregate Demand curve to the right or increase production. In this theory, it brings a trade off. That trade off is inflation and other economic issues. The prices of goods can be impacted, how does the factor into our economic recovery?

There are questions posed to me on why banks have not invested their Federal Reserve Quantitative Easing funds into the market. My retort to these queries is the following, "Why invest 'free money' into the market when the market seems to have so much uncertainty?"  The Fed is injecting the banks with cash at a very low interest rate. The banks are just rebuilding the reserves that were lost from the Real Estate market crash and they are preparing to make the next run. Banks and Investors are looking for places to park their cash, but the problem is where? Stocks are in decline, but not just here in the US, but in other markets as well. For example, Stocks in Asia are in decline as per this article. There is a large amount of market uncertainty and risk for these investors to feel comfortable. The volume of trading for stocks are no where near the levels of the 1990s.

If one is choosing Real Estate, the market prices have not fallen to the proper levels with the recent correction. In the residential market, the fundamentals are just not there to provide a large influx of cash for home buyers. Of course, with unemployment circa 8.6%-10%, it just does not make sense for banks to re-loan out cash, only to see these Mortgages jettison out into the secondary market again hoping that the home buyer does not default. This of course would lead the economy back to the year 2008 with another Real Estate market correction. It is difficult to loan out money when people are unemployed. Furthermore, banks are still attempting to deal with the large volume of distressed properties on their financial statements.

Currently, many investors are investing into Gold and other commodities. Some economists and financial analysts feel that this asset group has a looming bubble. If one is concerned about the Gold bubble, many Commodity experts state there are other opportunities to explore in this asset class. If the Governments continue to spend and "print" money viz a viz Quantitative Easing, Bailouts, and similar ersatz expansionist monetary/fiscal policies, the demand for Gold and other commodities will increase.  The question remains how long the run will last for Gold? Time will only tell.  The concern for investors with Gold is with the price at record highs, is it too late to enter this market? If a flood of cash enters into Gold, will it crash in a similar fashion as Real Estate in the 2000s and Equities in the 1990s?

In closing, the current macro economic climate is a intricate conundrum. The declining US Dollar, US Federal Government's high debt totals, a stagnant equities market, a precipitous Real Estate market , soaring commodities prices, and looming inflation are all concerns for the US Economy.  One thing holds constant and steady: Congress and our Politicians in Washington DC are engaging in political shenanigans and chicanery. Their "solutions" have contributed to this financial kerfuffle, but we the people must take some of the blame as well.. The complex economic puzzle extends globally, revealing how inter connected each of the countries' respective markets are to each other. There are no simple solutions to these issues. However, if one is a savvy investor, there are still opportunities in 2012 to make some serious cash.

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