10/9/12 – The U.S. Is Still the Best Place to Be

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Oct 9, 2012 11:10:42 AM

and tagged Fiscal Cliff, Europe, Yesterday's News

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The slowing global economy was the big story this morning. It was front-page news in the Financial Times (FT) and the Wall Street Journal (WSJ), with “IMF cuts global growth forecasts” and “Global Recession Risk Rises,” respectively. Although it didn’t make the New York Times (NYT) front page, it did make the front of the business section, with “IMF Lowers Its Forecast for Global Growth.”

The short version is that Europe continues to tank, China continues to slow, and the U.S. is at risk because of political uncertainty. The IMF is projecting continued though slower global growth, but that depends on a few criteria: Europe implementing the sovereign bond purchase program successfully and navigating its multiple other problems, China achieving a soft landing, and the U.S. not going over the fiscal cliff. A hefty set of assumptions.

Let’s start with Europe. Today alone, the FT has “German leader faces Greek fury,” which discusses how Athens is being locked down with riot police so Angela Merkel can visit safely, and “Europe’s economic storms start to batter the Nordic havens,” which talks about how even the well-run economies are now being dragged down. The WSJ has a couple of articles, “Athens Braces for Visit by Merkel” and, on the positive side, “New Euro-Zone Aid Fund Launches,” but as the FT notes, “Questions remain over E500bn EU rescue fund.” The strain is clearly rising, as seen in the NYT; at the European level, “Greece Is Given 10 Days to Adopt Internal Reforms” shows how patience is running out in the donor countries, and at the country level, “Britain Rethinks Its Opposition to a Two-Tier EU” shows that old certainties and decisions are starting to come into question elsewhere in the EU because of the problems in the eurozone.

There is not a lot on China today, although, as I mentioned yesterday, political and economic tensions are still very apparent there. Let’s give them a pass for today, and move on to the U.S.

Here, the signs are still trending not so much toward optimism as toward reduced pessimism. The FT has two articles, “Tax stance shift” (p. 1) and “Change of tone on tax eases fiscal cliff fears,” regarding how the Republican party is reconsidering its opposition to tax hikes on higher incomes. This is particularly interesting, given that the Romney rebound continues, per “With New Vigor Romney Resets Ohio Campaign” on the front page of the NYT. As usual, Nate Silver has an excellent analysis in “Following the Job Numbers as Well as Bouncing Polls” (NYT, p. A10). Worth a look.

I found these articles especially noteworthy in light of Romney’s comments during the debate about how tax rates will come down, particularly for higher earners, while tax bills will not. As Republicans get closer to the edge of the cliff and start to consider what it will actually mean to govern if they win, some of the rhetoric is being dialed back. A very good sign. I will have more on this in a subsequent post, as I am doing some analysis—which is actually rather encouraging—for a speech I am giving at our National Conference.

Overall, despite continued problems around the world, we are lucky to live in a country that is still growing and that has one major problem, the deficit, which can be resolved and, in fact, seems to be on track to be resolved. Glad to be here.

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