Booms, Busts, and Bailouts

12/19/2011 11:00 am EST

Focus:

John Stephenson

President and CEO, Stephenson & Company

A nauseating pattern of rallies and crashes has plagued the capital markets over the past year. Investment returns should be driven by fundamentals, but instead, are being driven by the news flowing out of Europe, the epicenter of the current financial crisis.  And with an impending crisis looming in Japan and close on its heels another originating in America, investors have chosen to hit the sell button sending markets sharply lower. The new normal isn't buy and hold-it's shuck and jive.

At the heart of these crises are massive issues of competitiveness that have created huge imbalances within trading blocks around the world. Since 2000, Germany's unit labor costs have risen 20-40%, less than those of other countries in the euro zone-creating a German export juggernaut, while the periphery's competitiveness has only slumped. If Europe had just a debt problem, that could be solved, but good luck trying to mandate competitiveness. The only thing surprising about the European experiment is that it took so long to hit a roadblock. 

Sure, it would be possible for Greece, Portugal, Spain, and Italy to engineer a productivity miracle of their own, but at what cost? They could slash the size of government, incentivize private investment, encourage foreign direct investment, and restructure their labor markets all in an effort to be more competitive. It would work, but these kinds of massive changes take boatloads of political will and years to pull off.  And while European politicians dither, proposing one half-baked solution after another, the market continues to fall as traders give the thumbs down to yet another euro zone interim fix.

As Europe circles the drain, fresh worries over debt instability in Japan, the world's third largest economy, have begun to surface. America's problems are fixable, but a dysfunctional congress seems destined to try investors' patience. 

Navigating the choppy waters of a world in crisis has made investing a full contact sport.  No longer can investors afford to sit and watch the world go by. The difference between success and failure is how well investors can read the tea leaves of the various cycles of booms, busts, and bailouts that the world is currently facing.

John Stephenson is an award-winning portfolio manager and Senior Vice-President with First Asset Funds Inc. in Toronto.  He is the author of "The Little Book of Commodity Investing" and "Shell Shocked: How Canadians Can Invest After the Collapse."  He is also the publisher of Strategic Investor (www.stephensonfiles.com). He can be reached at (416) 640-3283 or (877) 642-1289, or jstephenson@firstasset.com.

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