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While almost all of us in this business are inherent optimists, we need to be realistic about the economy and the world in order not to get ourselves into trouble again and to make sound investment decisions. First, Europe is still going round and round and not solving its problems. Greece remains a disaster and Spain is now in almost as bad shape. With unemployment in Spain in excess of 25%, and the government not working with the ECB as well as it should, things in Spain will likely get worse before they get better. France is in worsening shape and the new government is headed in completely the wrong direction with the lowering of the retirement age and the large tax increases just imposed. Italy bumbles along not fully tackling its core issues. The end result is Europe has many more years of crisis and potentially a complete reordering of the Euro. Whatever happens, it is going to be seven to ten or maybe more years before Europe is again a real engine of economic vitality. The real worry is that the standard of living will decline substantially and that will lead to major social unrest and the rise of far left or far right governments who then create even worse issues. Bottom line, Europe is not where investors are going to want to be for a long time. It may appear like a potential bargain, but it is not Japan, and the risks are huge.

China remains with major issues in banking and real estate as well as massive corruption. The new government seems to recognize the problems and the long term deleterious effects it would have on the political and social system. Whether they can do what is needed to fix the problems and get the country back on a growth path is possible, but unclear. People with a strong knowledge of China say there are major social and demographic problems in addition to the other issues and that long term China may not become the world power it seeks to be. The risk is the massive effort to build up its military and the historic philosophy of the Chinese to protect its near area, could lead to a military confrontation with the US over the next 5 to 10 years. There is simply no way to know but it is why Obama has made a policy decision to shift many US military assets to the Asia Pacific region.

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