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The Fiscal Cliff is a mix of laws and measures that will be triggered automatically if Congress takes no action between now and year-end on reducing U.S. debt. The resulting forced austerity will reinstate policies that will reduce the 2013 budget deficit by $607 billion (roughly 4% of current U.S. GDP). Yet if the U.S. debt-to-GDP ratio falls from 73% in 2012 to a sustainable 61% in 10 years, how could this be bad? The answer, as always, lies in the details.

When real estate property values, such as housing, are increasing at such a rapid rate that price levels become unsustainable (typically as a function of replacement value, affordability, rental equivalency rates, etc.), a real estate bubble occurs. The consequences of a real estate bubble consist of an inevitable plummet in values and general economic decline. The financial crisis that started in 2007 was caused by the global bursting of real estate bubbles, particularly in residential real estate, and predominantly in the U.S. and Europe.

Investing on the basis of fundamentals has long been a cornerstone for prudent investors. However, the rash of extreme geopolitical events over the past several years has tried investors' patience, riled portfolios and turned sound expectations on their heads. In this white paper, Greycourt & Co., Inc. examines the factors that have contributed to this dilemma and discusses investment strategies investors can implement to ride out the unusual market conditions in a thoughtful and disciplined manner.

The ongoing euro currency crisis has led to substantial declines in European asset prices. Measured relative to operating cash flow, European corporate assets are now selling at a 30% discount to the average of the rest of the world. While some portion of this differential can be explained by a weaker macroeconomic outlook, most of it is attributable to an increase in expected returns. Even if one assumes near-zero real earnings growth, the expected returns on European corporate assets exceed those available elsewhere in the world over an assumed five-year holding period.

While the European Union has made incremental progress in dealing with the Eurozone debt crisis, there still does not appear to be any "magic bullet" solution to the crisis. Market volatility remains likely without substantial new action from the European Central Bank.

The third quarter 2012 issue of Global Foresight focuses on emerging markets. David P. Harris, Chief Investment Officer, assesses prospects across emerging markets. Jimmy C. Chang, Senior Portfolio Manager, delves further into emerging market investment opportunities and examines the trajectory of the largest emerging economy, China.

In the aftermath of 2008’s “Great Recession,” businesses have been more risk averse and held larger cash reserves. This has been a mixed blessing, slowing growth while reducing the likelihood of another economic collapse.

After decades of decline, the U.S. manufacturing sector may be on the verge of a comeback. This resurgence is the result of numerous factors, including fast-growing wages in China and other emerging markets. While this developing trend should provide a modest lift to U.S. economic growth, certain industries and companies may stand to benefit more substantially.

If Congress doesn’t act by January 1, 2012, policies will automatically take effect that will reduce the 2013 deficit by $607 billion, or about 4% of GDP. While this policy, commonly referred to as "walking off the fiscal cliff," would be a near-term disaster, an extension of 2012 fiscal policy that fails to address increasing indebtedness could actually represent the worst long-run outcome.

Rockefeller Financial Managing Director Jimmy Chang looks at Greece's possible exit from the euro, the cooling of global markets and Facebook's disappointing IPO.