The Independent Market Observer

11/28/12 - A Lot More Good Than Bad

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 28, 2012 11:49:55 AM

and tagged Fiscal Cliff, Europe, Yesterday's News

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Kind of an interesting day, with some good news in the U.S. and a mix of good and bad about equally balanced in Europe. Let’s take one at a time.

The U.S. economy: Housing continues to perform strongly, with house prices up for six months in a row by an average of 3 percent over the past year. Even the worst-hit cities, such as Las Vegas, Phoenix, and even Detroit, have shown price gains. The continued strength in housing hit the front page of the Financial Times (FT) and A3 in the Wall Street Journal (WSJ), and it is a key part of the front-page New York Times (NYT) article, “California Finds Economic Gloom Starting to Lift.” California is often a leading indicator of the rest of the country, so this is particularly good news.

The recovery in housing will have effects across the board. The wealth effect will start to drive increased spending, which may already be occurring. Increasing values will rapidly erode the “underwater borrower” problem, since we are back to positive leverage effects instead of negative. Finally, labor mobility will be improved if workers can sell their homes in order to move. I could go on for a while on this, and I do so in my presentations.

Consumer confidence has increased again and is close to a five-year high. This seems partly due to housing, partly due to improving employment trends, and partly due to decreasing gas prices, among other factors. On the business side, durable goods orders have improved slightly, and the markets have substantially recovered from the post-election dip on speculation that the fiscal cliff may be resolved before year-end. All good news—at least here in the U.S.

For the fiscal cliff, per yesterday’s post, we have “Democrats Harden Budget Positions” on A4 in today’s WSJ, exactly as predicted, along with “House Republican Urges Party to Yield on Tax Cut for Most Earners” on A18 of the NYT, again as predicted yesterday. The Republicans are moving toward pragmatism, as the Democrats move away, but the active center remains with the front-page NYT article, “Now Touring, the Debt Duo, Simpson-Bowles.” I still think that this plan is the center around which a solution will coalesce. Risks remain, though, per “A Comment on the Budget Impasse Sends Markets Lower” on B9 in the NYT, which reports on the Senate majority leader’s statement that he is frustrated over a lack of progress.

In Europe, the picture is more mixed. On the good side, Greece once again gets a stay of execution, but on the bad side France is looking a bit more at risk, as the president threatens to nationalize a major steel plant if the Indian owner proceeds with planned layoffs. This made the front page of the FT, with “Hollande threatens nationalization if Mittal fails to guarantee French jobs.” The dispute also made the NYT and FT.

A couple points worth thinking about here. First is the growing clash between France’s political needs—with a newly elected Socialist president fighting with Germany over budget-deficit limitations—and the realities of economics. No one can guarantee jobs in a globalized world, and the French solution, nationalization, depends on the money being available to pay the workers, which simply isn’t the case. Moreover, by coincidence, there is an article highlighting the problem that Mittal is facing on B1 in the WSJ, “Problem: There’s Too Much Steel.” Steel jobs will be going away, and the highest-cost and least-flexible plants will be the first to go, such as those in France and Italy. Italy has the same issue, but for environmental reasons, as reported on A14 of the NYT, “Italy Government Faces Test As Steel Plant Says Ruling Would Force It To Close.” The largest steel plant in Europe has been shut down by a judge. Again, we have a political/legal versus economic/jobs clash in an industry that needs to downsize anyway. Which jurisdiction would you keep plants in? I still believe that Europe will muddle through, but, as I said yesterday, things could go very bad, and these stories are an excellent illustration of exactly how that could happen.

Once again, I am very glad to be living in the U.S. Most of our problems are of our own creation, rather than imposed from outside. Although this means that we have no one to blame, it also means that we control their solution. On the whole, that is where I want to be.

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