What a wild ending to 2012!  The uncertainty surrounding the Fiscal Cliff negotiations and then sudden optimism that there would be a last minute compromise to avoid it, tied a nice big bow of volatility to the gift Mr. Market gave us in 2012- an approximate 13% return.  The ending to 2012 offers several clues to what we expect to see in 2013.   Here are a few of them:

1.) More Kicking of The Can – Governments continue to try and inflate their way out of their debt problems.

The printing presses of the developed world are roaring- from Germany to the United States to very soon Tokyo under the campaign promises of newly elected Prime Minister Shinzo Abe. World governments remain committed to inflation focused approaches to treating their solvency issues rather than the more austere measures of restructuring balance sheets and income statements.   After all, the inflation approach is a less painful pill to swallow, b/c losses aren’t as large and economic activity, albeit limited, exists.   HOWEVER, while the pill may be less painful to swallow in the short term, it makes the road to a healthy recovery longer, slower, and more difficult.   Consequently, we also expect 2013 to offer…

2.) More Muddle Through – Slow economic growth, low interest rates and subdued inflation.

Highly indebted governments crowd out economic growth and the recession in Europe continues while growth in the U.S. remains slow.  U.S. Banks have their own issues and their concerns over regulatory related settlements trump their willingness to take any risk that would cause material improvements to lending.

3.) Housing Recovery & Oil Boom Continue

Related consumer confidence helps prop up the deflationary pressures of slow lending, flat corporate revenues, and unemployment.

4.) Gold Will Fare Well as Governments Fail to Adequately Address Their Fiscal Situation.

As long as developed world governments remain unwilling to make the tough decisions required to cut spending and increase taxes in a meaningful way, then their fiscal viability remains uncertain.   As long as their fiscal viability remains uncertain, then investors will seek “alternative currencies” like Gold as a place to park their money.

5.) Investments That Generate Income Growth While Offering Downside Protection Will Continue to Be a Focus.

The low yields offered by traditional bond portfolios will prove to be less and less adequate to cover living costs.   Individual investors will be increasingly forced out of the safe confines of fixed income and into equities, all during a period of increasing economic uncertainty.

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