2011 MWM Third Quarterly Letter to Clients

The quarter was punctuated by political struggles in the global economy. It seemed that every time there was positive economic news, it was marred by the latest news from the European Union (EU) or from within our own government.  The EU may be on the brink of disaster and the US saw its first agency downgrade of its sovereign debt in history after an ugly, frustrating display of bipartisanship. A leadership crisis is draining investors’ confidence in their government’s ability to make the necessary changes to improve the economy.

Within the United States, politicians seem unwilling to transcend the divide for the good of our nation during a time of economic instability, which is fueling anxiety. This is understandable because there seems to be a lack of understanding of the current economic crisis from our leaders. Both parties seem to be looking for a gimmick rather than real solutions and the economic solutions prescribed by both parties are in contradiction of one another and insufficient to solve our problems. Although this may be simplistic, Democrats propose stimulus with the goal of jolting the economy back to a state of normalcy. Unfortunately, the business cycle is not normal as there is a structural break in the economy that requires reinvestment in our resources to repair the economy to a point that we can compete in the global market. Republicans have reverted to their age old mantra “just cut taxes”, which is foolhardy at this time. Public finances cannot support this right now as we are underinvested in public education, infrastructure, science and technology.

Across the ocean, the EU has seemingly greater problems. The ratio of debt to GDP in the EU is 85.1% compared to 62.3% in the US (Source: CIA World Factbook). The stem of the EU’s problem are the countries affectionately known as PIIGS. Their individual government debt to GDP is even more dismal, as follows:

Greece 142%

Italy     119%

Ireland   96%

Portugal 93%

Spain     60%

Source: Eurostat 4/26/11)

The reason Europe governments have been unable to come up with a viable plan to resolve the crisis is that these countries should never have been welded together in a currency unit. They have different cultures, fiscal policies and language barriers. Only fiscal unity will save the EU but Germans are opposed to this and Greeks are opposed to austerity measures to meet German standards.

Politicians need to have a long-term plan that reflects the real deep needs of this economy. I am hopeful that this quarter was a wakeup call for world leaders. Time will tell when the US bipartisan budget committee reports later this year and the EU saga unfolds.

Please find enclosed your 3rd Quarter Portfolio Report.  If you have any questions, please call me at 518-867-4245.

Warm regards,

Olivia A. Mussett, CFP®