Economic Update: 3/15/11

Economic Update / 3/11/11

Dear Clients & Friends:

Given the unfolding events in the Middle East, we wanted to give you a brief update on our thoughts through the lens of a three-act play.

How the Three-Act Drama Unfolding in the Middle East ~ May Affect Your Money

After 30 years in power, it took only 18 days to topple Egyptian President Hosni Mubarak. He capitulated to the demands of the protesters and resigned as President. The quick toppling has led to a domino effect and instability throughout the region. What does this mean for you and your money?

Since the glory days of ancient Greece, we’ve had the three-act play. You know how it goes. Act I sets the stage, introduces the characters and identifies the main problem. Act II is the most important act because the main problem becomes much more dangerous and difficult and the protagonist of the story looks like they will lose. Act II usually ends on an emotionally-charged cliffhanger so you’ll be compelled to come back from intermission. Act III pulls it all together and the story wraps up with the protagonist (usually) winning and everybody (usually) living happily ever after. Ah, if only real life was so neat and tidy!

What’s happening in the Middle East might follow this script.

We’re coming to the end of Act I as the protesters succeed in ousting long-standing leaders like Hosni Mubarak. Act II in the Middle East would involve the rocky path of installing a democratic society. However, this phase could take a long time and come with much blood, sweat and tears. As one of the protesters said in a Wall Street Journal article on the day of Mubarak’s resignation, “It's easy to throw stones at the aggressor but it's not easy to chart a new course. Our hard work begins tomorrow.” As today’s youth would say, “True that.”

While it’s too early to know the outcome of Act II or Act III, it may make sense to look at two potential extreme outcomes. These bookends give us a sense for a possible worst case and best case.

Extreme Outcome One

On the negative side, if the Middle East erupts into a fiery ball of flames, it could be a serious problem for the world. The Middle East can be a powder keg and with its strategic importance in the oil market, any disruption there could send the world economy into a tailspin. Multiple countries are experiencing unrest among their people so the call for reform in the region is strong and certainly not over yet.

Extreme Outcome Two

On the positive side, the changes occurring in the Middle East could usher in a new era of democratic reforms that lead to faster economic growth and rising stock prices. Remember the fall of Eastern Europe’s Soviet satellite states and the toppling of the Berlin Wall in 1989? The decade that followed was a strong one for worldwide economic growth and stock prices. If the fall of Eastern Europe is a blueprint, then there could be some rocky, but survivable times ahead followed by a long period of growth.

Extreme Outcome Three ~ The Impact of Technology and Social Media

One of the big differences between the fall of Eastern Europe’s dictators back in the late 1980s and the situation in the Middle East is the rise of the internet, and, in particular, social media. The educated, internet-savvy young adults who helped fuel the protests in Egypt reportedly used Twitter and Facebook to mobilize their followers. While the fax machine was the technology of choice back in 1989, the tools of today are exponentially more powerful.

Victor Hugo said, "An invasion of armies can be resisted, but not an idea whose time has come.” For the Middle East, that idea is political and economic freedom. Our interconnected world enables the far reaches of the globe to see how the politically free and economically prosperous countries enjoy a relatively high standard of living. The people in these emerging countries see it on TV. They read about it on the internet. They travel to our country and become educated in our universities. They like what they see and now they want it for their home countries.

A few months ago, nobody was predicting the imminent downfall of Hosni Mubarak and the resulting domino effect in the Middle East. His swift decline is another example of how we live in a “speeded up” world of instantaneous communication and a desire for immediate gratification. That potentially dangerous combination means the ultimate denouement of this unfolding drama is any pundit’s guess.

As your advisor, though, we’re not in the pundit guessing game. Instead, we are actively monitoring the start of Act II and its potential implications for your portfolio. What this means for you and your money is that volatility and uncertainty are a fact of life. What happens in the Middle East can affect us very quickly—we have to look no further than the price of gas at the pump.

Regardless of how this drama unfolds, we will do our best to try and meet your goals and objectives.

If you have any questions or concerns about the Middle East situation and how it may affect you, please call us. We are here for you each step of the way. As always, thank you for your trust and confidence in our services.    James B. Driscoll, President ~ Senior Services ~ 1-800-797-1594