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2012 Investment Review: a year of worries —and unexpected gain

by Caldwell Trust
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2013_ForecastThe calendar year 2012 may have been a year of surprises, investor worries and disappointments but despite so many bumps in the road, it turned into a classic in terms of equity investments. It would be hard to recall any other year like it in modern times, with all its unique problems in a new economic paradigm before producing decent total return rates to stock investors. A quick glance back gives rise to eleven observations that seem to stand out as food for thought as we begin a new year.

Observation #1

As of this writing the economy is still tottering under the pressures of a slow growth rate with many people still out of work or underemployed. Yet some large public companies now hold more cash in their treasuries than the U.S. Treasury itself.

Observation #2

With strong odds that the past would repeat itself, the dollar instead held steady in foreign exchange markets even as the U.S. Treasury issued unprecedented amounts of new “paper money” out of thin air—all bonds being purchased in the open market even at record low interest rates. Now that is what one can truly call an unparalleled experience in the annals of economic and market history, it being almost the equivalent of repealing the law of gravity.

Observation #3

Year-end reports indicate that 2012 total returns on stocks came in at 9 percent for the DJIA and about 14-16 percent for the other major indexes. Those who held their ground, who were able to swallow hard and withstand such trials and tribulations along the way, were well-rewarded for their courage and patience.

Observation #4

Businesses were required to prepare themselves for unknown tax rate surprises as Washington, State Houses and Main Street all have their hands out for more revenue. In addition, businesses had relentless additions of new governmental, environmental and commerce regulations at all levels. Those obstacles still did not prevent most of America’s leading public companies from producing record earnings and dividends for shareholders—up 18 percent pretax year-over-year in the latest reporting quarter. This is better than anyone could possibly have predicted, and is providing the fuel that is supporting stock prices in tough times.

Observation #5

During the past year or so minor European Union (E.U.) member nations rioted for continuation of social benefits as their own economies were financially imploding under cost burdens and mountains of debt they were unable to service. This forced other major member nations like Germany to come to their rescue just to save the Union and the euro currency. The U.S. served as a backstop for the E.U. even while fighting for its own life financially.

Observation #6

While talk of a worldwide Chinese economic takeover flourished for the past couple of years, China actually spent the past year failing to live up to predictions, so instead had a change in its regime in Beijing. The new leaders apparently felt the best course for placating uneasy peasants in the backlands would be to return to building its military might by adding to—rather than destroying as the U.S. and Russia are doing by treaty—its stockpile of nuclear weapons. That act, in tandem with its ongoing efforts to add to its military ground forces, diverted attention to its faltering economic growth. Such actions were enough, however, to persuade Japanese voters to elect a military hawk to lead a heretofore non-military country.

Observation #7

Investors should take special note of the fact that America recently became the world’s largest oil producer, even as U.S. political leadership disallowed a maximizing of domestic proven energy resources. This was a surprising success story and very good news for the future of oil prices, coming as it did after proving once again that the U.S.—not China—remains the economic engine of the world. Other leading industrial nations could only watch in wonder as their own export-oriented industrial production capabilities retrenched when demand for goods and services from the U.S. also retrenched.

Observation #8

The Federal Reserve, under the leadership of Chairman Ben Bernanke, almost singlehandedly continued to guide the world’s financial systems through one of the worst banking and currency crises ever, standing firm enough to hold up the U.S. dollar against the euro, the yen and the pound sterling in spite of massive deficits and stimulus spending by governments, domestic and foreign, by what are now all completely fiat (paper) money systems. For what it’s worth, every major nation now incurs fiscal budget deficits that require them to routinely borrow to make up for deficiencies.

Sadly, for the first time in history, the U.S. deficit also rose to a level about in line with Japan, Germany and other nations when measured as a ratio to GDPs. Investors might wish to keep in mind that even though the Fed has won the first round this time, “the game isn’t over ’til it’s over” when it comes to playing footsie with paper money.

Observation #9

Total net wealth continued to grow despite all the economic problems America faces. An estimate now totals: (a) more than ten times the value of all the goods and services produced in the country in one year (GDP); and (b) ten or more times as large as the total U.S. national debt at year end of around $16 trillion. By comparison, this net wealth total is believed to be the same as or slightly larger than the total net wealth of the entire European Union countries combined and, based upon at least one report, is perhaps eight times larger than both China and Japan’s net total wealth as nations.

Observation #10

It continues to be worrisome that so little is written or publicized about generational wealth transfers each year in the U.S., which may be becoming the invisible hand that keeps consumer spending moving higher. Death is a human inevitability, thus wealth transfers are a certainty that takes place each and every day of our lives. Some portion, of course, always goes to charitable purposes. Personal experience assures me that by far the largest percentage is bequeathed directly or indirectly for the benefit of family members through trusts or other means. Regardless of how the transfers take place, trillions of dollars of wealth in the form of real estate, businesses, liquid and other assets must—repeat must—take place and do occur.

Unfortunately, there is really no way for authorities to capture many transfers with which to produce reliably accurate reports. These would provide better insight as to how much wealth and income is actually constantly moving from one kind of owner to another kind of owner. As a matter that is given little attention in the media, the totals are almost certainly now large enough to make them highly pertinent to public policy decision-making. Economic statistics that are generated and made public by government bodies do not and cannot take into consideration all of the transfers of money and wealth that occur. Financial needs and spending habits of the elderly differ widely from younger persons’ needs and habits. Therefore official economic reports are by definition incomplete and inaccurate. Relying upon faulty or incomplete statistics as the basis for political decisions that take the form of government tax and spending policies must, and always will, produce faulty public opinions and faulty policies.

Observation #11

Finally, as we have mentioned many times before, there continues to be a similar vacuum in the mass market media regarding who benefits most from changes in public policies, especially ones that deal with changes in tax rates, as was the case in 2012. Large and growing tax-sheltered retirement plan portfolios, held mostly for the benefit of middle Americans, own a very large percentage of the $60+trillion of publicly traded stocks outstanding today. These holdings are impacted directly by, but completely submerged behind, unceasing political wrangling involving miniscule amounts that are and have been the subject of “ideological” debates that the media are fixated upon.

Until the lack of public attention to this vacuum is addressed and remedied in political debates, outcomes will continue to produce ill-designed policies for achieving intended purposes, and voter sympathies will continue to be influenced by emotion and stereotypical rhetoric rather than by economic fact and realities.

Investors would be well advised to bear in mind always that a huge market exists that is insatiable for quality securities in which to invest, no matter how badly conditions may appear at any given point in time. This support for share prices is not going to go away as, day after day, those making cash contributions to pensions or retirement plans continue to need a place to invest them.

Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.

 

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