Oh, yes—spending cuts! The papers this morning are all about both. The key article, and the one most people (160 million of them) will be talking about shortly is on the front page of the New York Times (NYT), “Payroll Tax Rise for 160 million Is Likely in 2013.” The expiration of the 2-percent payroll tax on earnings will hit everyone immediately in the new year, and it’s not likely to be reinstated.
This is just a part of the fiscal cliff, which is becoming clearer and clearer as the election approaches. Taxes will be going up, and spending will be cut—the question is how. “Way round the fiscal cliff still unclear” on page 2 of the Financial Times (FT) is pretty self-explanatory and leads with the conclusion that Congress is unlikely to resolve the issues in 2012, leaving another potential pending crisis in 2013. Patriotic citizens are glad to contribute more, led, of course, by private equity managers. According to “Private equity managers fear tax hit” in the FT (p. 17), they are attempting to rewrite existing agreements to specify that they will make more money to compensate if their taxes go up. Clients, unsurprisingly, do not seem to be in favor. No doubt, the managers want to make sure they can continue to spend and stimulate the economy, which will then trickle down.
And the economy needs the stimulus. There are real questions about whether QE3 and other monetary measures can really stimulate—see “A Bernanke Bump or Fed Fallacy: Can QE3 Juice Stocks?” on page C7 of the Wall Street Journal (WSJ). The world continues to slow, per the front page of the WSJ, with “Trade Slows Around the World,” “China’s Provinces Feel Pinch” (WSJ, p. B4), and “Welcome back—again—to the Eurozone crisis” (FT, p. 11). Indeed, Europe seems to be the poster child for weakness today, with “Grim prospects force jobless Irish abroad” (FT, p.5), “Greek GDP to Shrink More than Expected” (WSJ, p. A9), and “Spain Expects a Wider Budget Gap” (WSJ, p. A9).
The slowing global economy continues to be the story—although, really, this is old news. The WSJ article on the Bernanke bump points out that monetary stimulus has been less effective with each successive round, and that this round has had the quickest turnaround so far. Perhaps we are settling into the reality that it took a decade to get into trouble, so it will take more than a couple of years to get out.
I am working on the monthly market update, so today’s posting is short. The monthly video should be posted tomorrow and the written update shortly thereafter.