Happy New Year!

We’re kicking off 2013 by taking a fresh look at the world, which will yield some good news to get the New Year headed in the right direction. You’ll see why, despite our current crisis, there’s reason for hope.

After that, we’ll move to a real solution to our current crisis. It’s a solution that comes right from the heart of America and our unique tradition of liberty.

We’ll be building on last January’s kick-off, when we recommended two specific tools to increase your understanding and improve your judgment, as you negotiate your way through our ongoing crisis, as well as that of January 2011 when we provided some clear, practical advice about how best to manage your affairs, all in three easy lessons. I hope you found those tools and that advice helpful in your investing as well as in your life.

While determined to take a fresh look at things, we can’t forget that not only are we navigating through the choppy waters of this biggest economic and financial crisis of our lifetimes, but we also face strong headwinds coming at us from our friends in the MSM (main stream media). Here’s what they’re up to lately.

Whatever Happened to the European Debt Crisis?

Last year you couldn’t get away from the impending disaster that was going to swallow not only Greece, but also Italy and Spain, with France as the last stop before the crisis spread like a flu epidemic to eventually infect the U.S. as well. It was the talk of the town at Davos, Switzerland, the little town where all the world’s “greats” gather once a year to ruminate about the state of the world. Through most of 2012 the news from Europe followed the Davos script, until Mario Draghi “saved the day” when he told everyone the European Central Bank would provide whatever “liquidity” might be needed to – how else to put it? – keep kicking the can down the road. (Of course that’s not what he said, but it is in fact what’s going on.)

…It Turned Into the Fiscal Cliff

Disaster was averted – for now. But while most of us took a deep breath to relax our tense mental and emotional muscles, the mainstream media – who live and breathe crisis, murder, mayhem, etc. – filled in what remained of 2012 with the ominous-sounding “fiscal cliff” crisis. Of course, even that can was given a good swift kick as we rang in the New Year. But not to worry, there’ll always be the impending “debt ceiling” crisis to pick up the slack.

Back to Davos: as they gathered for the 2013 fiesta, Europe dropped off the list of concerns for the world’s pooh-bahs. This year attention turns to the U.S, with Europe settled down, and its recession not getting worse. Now they want things to perk up here. Giving a nod to the fact that the U.S. has not been in recession, they suggest that if things pick up here, it will spill across the ocean and get things moving in Europe – and the rest of the world – too. So this year, instead of a financial flu spreading from Europe to the U.S., they’ve proposed the administration of a U.S. anti-virus to cure a world suffering from fiscal fever and body ache. Forget their previous scenarios that painted the U.S. as an aging toothless economic tiger to be upstaged by a Chinese dragon; the tiger roars again!

Does this all make your head spin? If it does, it’s because your reason and common sense are working as they should. When you make the effort to use your brain, seek the truth and make sense out of what’s really going on, you can’t help but get dizzy listening to or reading some of the drama-queen nonsense the media throws up against the wall over and over until they get the attention they desperately crave.

Instead of listening this sort of phony trumped-up stuff, let’s take a deep breath and put our thinking caps on. Okay?

When it suits their purposes, you’ll either hear endless choruses of “Happy Days are Here Again” or the ominous refrain of Darth Vader’s theme from Star Wars – one right after the other, sometimes even at the same time. Hence the head-spinning dizziness. Our suggestion: turn them off; if not permanently, at least try it just for today. Okay?

Now that we’ve steadied ourselves we’ll get on with this year’s agenda. But before we start, remember this: our crisis – Europe or the U.S. – hasn’t just disappeared. It’s got a ways to go. Where and how it stops, no one really knows. And that means – and this is really important – we’ll be spending some time this year focusing on how we get from here to there – here being the crisis,there being what lies on the other side when this crisis is finally resolved. Just remember that some sort of resolution will present itself in time. Just not now.

We could speculate about how we think all of this will be resolved, but frankly even an educated speculation isn’t all that much better than an idle one. A better approach, we suggest, is be prepared as best you can, for any number of possibilities. What those possibilities might be isn’t part of our discussion today, but we should be able to address some of them in future letters.

Oh, and one more point before we kick off 2013: you should understand that we’re far beyond the point where any government solution will provide a lasting or, frankly, even a temporary fix of any real substance; nor can we just “grow” our way out of our current troubles.

Those who tout big government as capable – or even willing – to make everything alright are smoking the same stuff as those who swear that if government would just “get out of the way” the economy will grow like gangbusters. I’m not saying that markets can’t settle matters in some way if left to their own devices. But being as far down the road as we are, such settlement would probably be, well, unsettling (to put it mildly). And politicians, as we’ve explained many times in the past, will not allow things to get unsettled on their watch.

So, to sum up, getting from here to there isn’t going to be easy – and it may very well be rather unpleasant. If you’re smart, you’ll brace yourself and, again, be prepared.

With that in mind, let’s get to that good news we promised.

Why Things Will Get Better

If you’ve read these letters for any length of time, you know that I’ve never been shy about pointing out the serious pitfalls that lie in our immediate future. On the other hand, the New Year represents something fresh, an opportunity to, in some sense, start over. That’s why some of us make New Year’s resolutions. We want things to improve in our lives.

It’s in that spirit, thinking about 2013, that I concluded that it’s time to talk about things getting better, if not immediately then at some point down the road. Just as we want to be prepared for the worst, why not be prepared for the good that will follow? We’ll start our preparations by looking at events from both history and our own experience that point to a brighter future some day. As far as when all this will occur, we’ll have to set the timing issue aside for now. For the moment, let’s just concentrate on three simple concepts: hope, faith and experience.

How Hope, Faith and Experience Point to a Brighter Future

When we talk about hope, we’re not using the term as it is frequently used in everyday conversation. We’re referring to realhope, a concept traditionally categorized as a virtue. Let’s spend a few moments on this.

We typically use the term “hope” to refer to a “wishing” for something, or to a mere “feeling” that we’ll get what we wish for. But the virtue of hope – as opposed to some feeling of hope – implies a confidence, an expectation that even includes a level ofcertainty. That’s the hope we’re talking about here. A good definition is one given by the medieval Scholastics: “a movement of the appetite towards a future good, which though hard to attain is possible of attainment.” Hope can and should be an integral part of our lives as we look to the future. Indeed, that’s why “hope” has traditionally been categorized as a virtue.

Can you see the difference between the wishy-washy “wish-feeling” and this more meaty definition? I hope you can.

Also, do you see how our use of the term “hope” has nothing to do with “positive thinking”? You can get yourself into a lot of trouble with the false optimism that is frequently built into a lot of positive thinking “systems” out there. The hope we’re referring to has nothing to do with false optimism; this hope is one born offaith and experience.

From the perspective of faith, assuming you believe in God – more specifically a God who loves you and wants what’s best for you – you can, indeed you must, have hope in the future. Your hope springs from a confidence that, no matter how things seem to younow, even in your darkest moments, God wants you to share in some way in a future happiness – whether in this world or the next. Some religions focus on happiness in the next life. Others allow for some measure of happiness in this life, at the very least allowing for the pursuit of happiness.

Of course, this should ring a bell with every American, shouldn’t it? Remember the Declaration of Independence – a document admired by so many around the world, even to this day? The Declaration states:

How many times have we read and heard these words? Yet isn’t it true that they don’t always ring out loud and clear these days as perhaps they once did? Have we consigned these words to our July 4th celebrations, forgetting that they form the foundation of our laws? Indeed, you can make the case that they are the very heart and soul of this nation.

Then there’s this: How many people educated in the last 40 – 50 years have even read or heard of, never mind studied these words as part of their education? Why? While we won’t attempt to answer that question now, just know that these aren’t old, dusty, irrelevant words that we can ignore. In fact, as we’ll see in our next letter, they represent one eminently realistic solution to our current crisis, a crisis that seems so hard to shake.

For now, let’s continue our discussion of hope with some observations that don’t rely on your particular religious views or inclinations. The fact is, you can make a case for hope in our future from the vantage point of experience. You see it every time a crisis hits, even those crises that reduce everything to ashes. To show you what I mean, we’ll start by looking into the distant past.

The Roman Empire: From Glory to Ashes…and Back Again

The collapse of the Roman Empire in the West ended centuries of political unity, characterized by relative stability and peace – an era known as the Pax Romana (Roman Peace). That collapse plunged the West into the chaos of the Dark Ages, when instability and violence were more the rule than the exception in daily life. Yet even as the Empire dissolved into chaos, the first seeds of a new world order were planted.

Monasteries immediately sprung up in the West which preserved the religion and culture that had developed during the Pax Romana. In time, a new arrangement of society known as Feudalism rose from the ashes of those first dark centuries. Feudalism imposed a degree of social order on the chaos, as the Dark Ages turned into the Middle Ages. While the term “medieval” is frequently used as one of disparagement today, any objective reading of the history of the Middle Ages reveals a relatively stable society which fostered a flowering of art and commerce, in addition to the higher learning that laid the foundations of modern science and technology. Indeed, an argument could be made that the beginnings of what we now call the Renaissance occurred in the 13th century, rather than the 15th, if it were not for the intervening 14th century.

Tragically, the 14th century witnessed one of the greatest catastrophes ever to strike the human race: the worst outbreak in history of the Bubonic Plague – a deadly infectious disease which occurred with some frequency both before and after the 14th century. This time, however, it practically exploded in Europe with a fury that earned this outbreak the ominous name “Black Plague.” And a black time it was for the estimated 25% – 50% of the population of Europe who died – even more so for those they left behind.

In her book A Distant Mirror: The Calamitous 14th Century, Barbara Tuchman describes the shock experienced by millions as the world around them disintegrated. In some European towns, the majority of the inhabitants would die in mere months, leaving the survivors starving and depressed, with many of those survivors descending into not only hopelessness but insanity.

Feudalism – the order of society that governed people’s lives – could not be sustained with such a reduced population. But as Feudalism unravelled, the dearth of people caused by the plague created a shortage of labor that ultimately increased the economic value of surviving workers, leading to a new society. The rebuilding of Europe led to a realignment of social relations that rekindled the renaissance of learning of the 13th century, creating what we now know as “The Renaissance.” The rest, as they say, is history.

Our recent discussions about currency wars provide a more current example of the same process, as we witnessed the unparalleled destruction of two world wars in the 20th century. (You can find more by clicking HERE and HERE.) Only the fall of Rome or the Black Plague could compare with the catastrophic destruction of property and people wrought by these terrible wars. Yet less than 20 years after the end of World War II, Japan and Europe had risen from the ashes. (If you’ve never seen examples of the sort of destruction we’re talking about here, just Google “devastation of war.”)

In case you’re tempted to think that it was only the power and wealth of a victorious – and generous – United States that brought these devastated countries back from the dead, I suggest you also recognize the ability of all of us, as people, to somehow simply pick up the pieces – even in the midst of the worst imaginable circumstances.

Just think of your own life. Have you never faced, at the very least, set-backs, disappointments, if not suffering and tragedy, that at the time seemed to be, or at least felt like, “the end of the world”? We all have. Perhaps you’re facing such prospects even now. For the most part, what happens?

Yes, we may be devastated, even depressed for days, weeks, even months on end, after some of the particularly terrible and vicious events that life inflicts on some of us. But, most of the time, don’t we at some point pick up the pieces and start over again? Okay, you can say “What choice do I have?” But that’s just the point. In the case of the great calamities we noted above millions of people picked up the pieces.

While Feudalism grew out of the Dark Ages over the course of centuries, its seeds, as we noted, were planted even as the Roman Empire collapsed. People began picking up the pieces even as barbarians carved up the Empire. During and after the overwhelming shock of the Black Plague people thought – for a time – that the end of the world was literally upon them, until they realized it wasn’t. Once they began picking up the pieces, it took decades, not centuries, to recover.

I could go on, but I hope you get the point. And please know that I am by no means minimizing any personal difficulties you may be facing right now. Our close friends who lost their home after Sandy struck, about whom I wrote at the end of Thanksgiving’s letter, remain in temporary quarters, struggling daily to rebuild their home and, indeed, their lives. But they are in fact picking up the pieces and rebuilding.

So getting back to our original point, history and our own personal experiences tell us we are capable (perhaps more than we think) of getting from here to there and we will. Which brings up back to here – and now.

Having seen the reason for hope, next time we plan to bring you a clear solution to our crisis as we continue to navigate through 2013. For now, we catch up on some unfinished business from 2012.

The Best Way I Know to Deal With Complexity in This World…

As you may remember, we talked a great deal about “complexity” and the problems it presents. But I somehow neglected to share the best way I’ve ever come across to handle complexity: opera.

Yes, I realize a few of you may not have become converts over the years as I occasionally promote this most glorious of art forms. But I would ask you to bear with me one more time and experience how a great genius deals with one complex phenomenon: everyone talking at once.

What could be more complex and puzzling than a room full of people all talking at each other at the same time? How to sort it all out? For most of us, there’s no way – unless you’re a great opera composer. As the character of Mozart explains in Peter Schaeffer’s play Amadeus:

Yes, it is! And without further ado, we turn to four people talking at once, who not only make sense, but provide a magnificent example of human creativity and ingenuity. We’re going to listen to the quartet from Verdi’s Rigoletto, perhaps the greatest operatic quartet ever written. And to make it even better, I found a performance that features Luciano Pavarotti and Dame Joan Sutherland. Without getting bogged down in this opera’s complex plot, here’s what you need to know.

On the right is the Duke, a real cad, schmoozing with a loose woman Maddelena. On the left is Gilda and her father, Rigoletto. Follow the subtitles in English as the piece begins. You’ll understand what each is saying and thinking in the first half of the piece, before it’s all mixed together in the second half.

(By the way, Dame Joan’s final high note – usually sung an octave lower by lesser mortals – is worth the price of admission. Don’t miss it!)

Ah, if life was opera, it might make a lot more sense – and sound a lot better too, don’t you think?

( Click HERE for the performance.)

With best wishes for a Happy and Healthy New Year,

P.S — Looking for more insight into what 2013 holds? Check these comments on “Global Catastrophic Risk in 2013” or, for more reassuring comments, a view of cyberterrorism from a real expert. Or try my favorite: “Why Wall Street is and Will Always be a Sales Organization”

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com