There is over optimism in the market. There seems to be over-optimism based on short-term evaluation of key statistics. Sure, the economic figures of America show promise, but the European dominoes will begin to fall.
Entering the market now feels like entering a hot tub that just had it’s warm water cut off. Feels great when you just enter the market, but it will suddenly hit you with a tingling freeze. This is my problem: European contagion is not completely limited by austerity measures, and the American debt problem is being hand-waved, not solved.
If the problem is not solved, as my philosophy goes, we have not yet left the crisis zone. Unemployment has not reached pre-2007 levels, and the real estate market has not yet picked up. These two things point to the fact that the United States is unable to return to previous levels of consumption, because not only is the government indebted, the citizens are indebted as well.
This will be one of the moments in history, where unfortunately, as much the government tries to muster, they cannot bring together a large enough force to bring down the monster of a recession. The problem is political paralysis. There is no unity in America to bring together any solution at all. Quoting Teddy Roosevelt:
“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
With political paralysis in America, debt talks will not move forward, and decisions will be dragged until America is literally on the guillotine. Unfortunately, with the way the political atmosphere is rolling around in 2012, there will unlikely be a solid majority for either party in the executive and congressional branches to enact any major changes. More political paralysis will likely follow in America.
Europe is unfortunately not much better off. The European Union simply does not have the resources to bailout Spain, Italy and Greece all at once. The debt contagion in these countries has spread so wide, it is beyond political control. A government will collapse if they take a 50% deficit reduction plan, but that is unfortunately what Greece has to do to stay afloat. Greece is zombified, with its death foretold, but delayed, and Italy and Spain are probably going to go into recession for a few more quarters.
This is the problem. There is no solution to any of the current problems that can “blow over” all the issues. We can only watch the world collapse, the market cleanse itself, and start again from the beginning.
My recession percentage: 50/50
Investors should look at current optimism with a grain of salt. It is quite unlikely it will not continue.