Youth is when you’re allowed to stay up late on New Year’s Eve. Middle age is when you’re forced to.
2011 By the Numbers
Let’s start with a short report card on the 2011 performance of a few key indices: (You can click on each index to see the chart.)
S&P 500: No Change
CRB Commodity Index: -8.3%
Canadian Financials (XFN): -4.4%
U.S. Financials (XLF): -17.1%
Bonds (XBB): +9.3%
Canadian Dollar: -2.1%
Shanghai Composite: -22.6%
You can see that, although commodities in general were down for the year, gold and oil still rose. Copper was down over 20%, commensurate with the “global growth is slowing” thesis.
In general, the markets painted a picture of the quintessential secular bear market in 2011. Specifically, the S&P 500 chart maps the volatile road to nowhere that characterizes secular bears. “While the $SPX finished where it started (1257), it swung about 3238 points over the course of the year to do it.” (via @TBPInvictus)
How Did 2011 Predictions Do?
In my overview of 2011 What Ifs, I noted that sentiment was largely bullish to start the year. We had experienced quite the stock market rally off the March 2009 lows and many were anticipating a strong economic recovery and continued support from central banks and governments.
Whether you were a bull or a bear to start 2011, you could probably claim some kind of victory, for the overwhelming trend of the year seemed to be increased volatility. We regularly saw multiple percentage point moves intraday in just about every global index. Precipitous downdrafts seemed to be followed by rocket rides higher with almost alarming frequency as most traders and investors developed a chronic case of headline whiplash.
I picked bifurcation as my dominant theme for 2011. Based on the underlying biflation thesis I’ve carried for the past few years, I thought we would continue to see a rising cost of living coupled with slow economic and employment growth. I also thought the U.S. housing market would remain stagnant and that we would see a growing divide between the prosperity of high and low income households.
Commodities had risen a lot since the 2008 lows and we had not yet seen the full effects of those increases at the grocery store yet. If you bought groceries in 2011, you no doubt noticed that just about everything has gone up in price by a significant margin. Energy prices remained elevated as well, adding to the strain on the average to low income consumer. Many predict that these high food prices are here for an extended stay.
I also mentioned the bifurcation we’ve witnessed between wealthier and highly indebted sovereign nations. This dichotomy came to a full boil in 2011 as the European debt crisis seemed to be in the financial headlines daily and was regularly mentioned as the one issue that could send markets tumbling or soaring depending on the headline du jour.
Interestingly, the crisis in Europe is rooted in problems caused by economic bifurcation in the Eurozone. Nations with lower debt loads are trying to figure out how to get debt-laden countries to strengthen their balance sheets without taking down the European (and global) economy or asking their own taxpayers to foot the bill in the process – no small dilemma.
Occupy & Steve Jobs
The bifurcation theme is fittingly captured by the juxtaposition of two of the major financial headline-grabbers of 2011: the Occupy movement and the passing of Apple CEO Steve Jobs. The Occupy Wall Street movement grew out of a frustration with the burgeoning divide between the ultra-rich and the not-so-rich. People seemed to have had it with watching financial scandals affect their livelihood and then witnessing the instigators of these crises walk away with multimillion dollar parting gifts rather than orange jump suits and handcuffs.
Very shortly, however, an anti-Occupy meme seemed to erupt wherein the message of the movement was misinterpreted as a wealth-hating, anti-capitalist, anti-success, and (gasp!) anti-American sentiment enounced by jealous whiners. Jamie Dimon’s “stop picking on billionaires” statements were alternately met with applause and derision depending on which side of the Occupy debate you reside. For the record, I’m with The Reformed Broker.
Compare this divisive backdrop with the unanimous grief with which the passing of Steve Jobs was met. Steve Jobs was pretty rich. And yet his loss was sincerely mourned by those who profited from Apple’s zooming stock price as well as those who could barely afford their latest devices – but wanted to buy them anyway.
Although I’ve read a few less-than-flattering articles on Mr. Jobs’ aggressive pursuit of his goals, I can’t help but think that the company he founded may be one of the last bastions of true capitalism. You see, Apple actually makes stuff – really cool gadgets that people find extremely useful in their everyday lives – at home and at work. Nobody seems to mind paying a little more for them and nobody that I know ever said Steve Jobs didn’t deserve to be very wealthy.
Contrast that with the manner in which some members of the financial elite came upon their wealth. Many have derived tremendous income from the creation of derivatives like the CDOs that sunk the subprime market or the CDS that will either protect or implode the financial system, depending on whom you ask. When these things do blow up, the financial elites escape accountability and happily leave others (taxpayers) to clean up the mess. While the financial sector is a vital component of our economy, it has become too large and too powerful. It contributes too little to the real economy and siphons too much capital for itself.
Let’s hope that the capitalist vision of a company that exists for the purpose of, and derives profits from useful contributions to society did not die along with Steve Jobs. Let’s hope that the bifurcation of 2011 someday gives way to the kind of unity engendered by the accomplishments of Mr. Jobs. Real capitalism is alive and well. We just need to cultivate it a little more and get serious about pulling those weeds. These are some of the lessons I’m taking away from 2011.
What did you learn in 2011 that you’re taking with you in 2012?