At the end of 2011, we believed that economists and Wall Street analysts were generally too optimistic with respect to 2012 expectations. Since then, we’ve been proven correct. United States (and EU) GDP is far lower than expected. The U.S. deficit (and thus our national debt) is larger than projected. And predictions of corporate earnings turned out to be too optimistic. In fact, analysts now expect third quarter earnings for the S&P 500 to come in below 2011 levels.
We continue to be haunted by Mr. Bernanke’s admission that we “have been in the process of learning by doing.” One can always hope that academic work translates to the field, but we think it’s unlikely. Instead, we expect unintended consequences to create future dislocation, and with it, opportunity. We’re ready, and we’d prefer it occur sooner rather than later.