A Look at Current Conditions

Some people are looking for a quick solution in Europe; however, the problems of excessive debt and lack of competitiveness for Greece, Portugal, Italy, and Spain are deep and complex. It will take a considerable amount of time to fix these problems. Labor market reform and some degree of debt forgiveness seem essential in these countries. It seems the political commitment to the Euro is still intact, and so compromises will be reached and a disorderly default by a sovereign or in the banking sector seems unlikely. Expect Europe’s next few years to be like the last two – there will be continuing political positioning, their economies will be in or teetering on the edge of recession, and the region will continue to be a source of volatility and uncertainty for world markets.

In the United States, the fiscal cliff is a concern, and is the main factor holding the economy back, with growth likely to be 2%-3% for this year and next. The Fed is tempted by QE3, but it would be a policy error because it would weaken the dollar and increase commodity prices, driving up input costs for U.S. business. Don’t expect anything constructive from Washington ahead of the election, but stay up to weight in U.S. assets, especially equities and commercial real estate.