Macro Thoughts

Overall I remain more bearish on the equity markets as governments around the world aggressively alter monetary and fiscal policy to manage local crises. While I believe governments should be very attentive to market efficiency, all this activity by governments potentially exasperates overall tension in the global markets. One example is inflation risk in emerging economies fueled by deflation risk in mature economies as these governments keep interest rates low to stimulate growth. The low interest rates in mature economies drives capital into higher yielding emerging economies and forces emerging economy governments to apply the brakes, thus potentially slowing growth in mature economies.
 
While I could list many issues that likely lead to greater fear, the main three are:

(1) Continual tapping of the brakes in the U.S economy reins in recovery potential. Tighter lending standards, slowing government stimulus, higher tax rates next year, and high consumer debt levels.  The outstanding debt is like an anchor, in my mind without job growth, as any uptick in interest rates due to a brighter economic outlook provides a kick in the teeth to consumers looking to buy a house or car in the form of higher payments. Until the country reduces debt levels to where higher debt payments can be comfortably afforded, I see a tepid recovery.

(2) Potential financial death spiral in Europe. Following up on the higher overall debt levels, Europe has long relied on debt to fund their societal choices. Is Europe able to move enough money around its members to offset worries in the market, or does it become a domino effect in which one country's problems triggers higher borrowing costs in another, thus pushing it into financial peril? The high cost of insuring European debt is starting to place more pressure on the system, in my view.

(3) China slowdown. The Chinese are attempting to slow inflation and slow the boom on property prices. Can the government strike the right balance or does the government's efforts over-shoot and push the country into a Chinese-style recession (best case recession scenario is modest growth, worst case is something like catching the 1997 "Asian Flu"). Should the Chinese economy continue to slow it may trigger another Asian country's problems, which in turn causes a broader issue.

In this environment investors can plan for surprises, either in the form of unforeseen breakdowns in seemingly insignificant markets or government action. In summary, investors should plan on volatility and position themselves with flexibility to pounce on opportunities that likely appear over the next couple months.