The year 2011 will forever be remembered as the year of protests. In the Middle East and North Africa, from Tunisia to Egypt, Libya and Yemen, the Arab frustrations took to the streets to protest decades-long autocratic rule. In the Western World, streets were filled with those voicing concern over austerity measures, frustrations over capital market excesses, as well as government inabilities (unwillingness) to do the right thing. Beyond the press headlines, the protests did succeed in overthrowing four governments, a number likely to grow higher.

It is very disconcerting to see the governments bickering in times of trouble. Unfortunately, it’s human nature to take it as close to the wall as possible, before putting measures in place that should have been initiated months beforehand.  In many respects, the current market bears a striking resemblance to the 2007-2009 fiasco, in which the factions in the U.S. politics dragged the fiscal and monetary fixes later than the market and the economic world needed. The longer they wait, the greater the stress, and ultimately, the greater the economic scar tissue that’s longer lasting.
 

Global Investor sentiment towards the risk trade worsened in the second quarter.  Global equity shares retreated as the euro contagion risks, as well as the U.S. debt ceiling uncertainties dominated most headlines.  While commodities did also retreat, they faired better than equities.  Gold bullion, on the other hand, advanced $70/ounce during Q2, but the gold shares acted like stocks, and retreated in a bad macro environment.

Have the green shoots been plowed under?

One of our key tag-lines following the financial crisis has been “the green shoots in the economy are beginning to reappear”. These green shoots, of course, represented the early stages of growth following the economic winter of Fall 2008.

The year 2010 brought investors along on a roller-coaster ride. While the full-year results for the U.S. S&P 500 and the Cdn S&P/TSX indices were seemingly average looking, the markets did rally out of the gate, sell off in the spring & summer as a result of the Euro Sovereign Debt fears, only to rally again in the fall-winter on better economic prospects.

Much has been said recently about Japan’s lost decades. The chatter is in reference not only to its economy's stagnation and its stock-market weakness, but, more importantly, to the analogy used to characterize where the United States is heading. Japan's equity markets, as measured by the Nikkei index, reached a peak of 39,000 twenty years ago.