12/27/13 Problems Get Solved – Annual Progress Report

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 27, 2013 9:13:50 AM

and tagged Fiscal Cliff, Commentary

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I was reviewing the posts I made last December, and it occurred to me that many of the problems we were worrying about then have largely been solved, or at least are on their way there. I think we all have short memories and tend to look more at the now than at the recent past, so it’s worth highlighting some of the very real improvements that occurred in 2013.

The biggest relief, of course, was the successful passing of the date for the Mayan apocalypse. No doubt you were all as worried as I was about the impending end of the world, but, ultimately, my decision not to sell everything and head for the hills was vindicated. We are still here.

Coming a close second, and which I had completely forgotten about until I went back to review some posts, was the fear that the government would be closing the deficit by confiscating private retirement accounts. I had several advisors talk to me about this, driven by client fears, and I ended up writing a piece debunking the idea. It seems kind of silly now, but at the time the fears were very real.

The fears, of course, were driven by the pending fiscal cliff, which promised something that was presented as economic apocalypse. The idea was that the political system was irretrievably broken, and that the economic system would follow shortly thereafter.

As we went off the fiscal cliff, the economy was expected to go back into recession, the dollar to collapse (a big fear then and even quite recently), and unemployment to spike back up. Last December, the Federal Reserve (Fed) even, for the first time, made a specific link between unemployment and its policies—a big step, and one that highlighted the concern.

The posts I wrote, by and large, played against these fears. I take no credit for my call on the Mayan apocalypse, as had I been wrong on that you would not be reading this now. But I consistently highlighted the improving real economy, the fact that the dollar would not collapse, and, in fact, the extremely high probability that the financial world would not end any more than the real world would. I actually titled my 2013 outlook piece, “The Economy Returns to Normalcy.”

Let’s look specifically at where we are on the problems that were so exercising us last December. For the fiscal cliff, a deal was cut and, even though we hit the sequester—which was designed to be so harsh that it would never take effect—and even though taxes went up and spending was cut—which slowed the recovery significantly—we still had accelerating growth in the economy throughout the year. The fiscal cliff actually ended up with very significant improvements in the country’s fiscal position, with the deficit poised to decline below the rate of economic growth in 2014, which means that the debt as a percentage of gross domestic product may well start to improve.

As for the dollar collapsing, the U.S. continues to be the dominant economy in the world, and the dollar remains as solid as ever. For the government confiscating retirement accounts, we have heard no more of that.

Finally, the economic recovery has not only continued but also continued to strengthen, against most expectations and despite the headwinds of the tax increases and government spending cuts. We leave the year in a much stronger position than we entered, which the Fed has just endorsed by starting to taper its stimulus program, driven by a decrease in unemployment larger than anyone had been expecting.

The headlines today, which prompted this post, suggest that the improvements will continue. The front page of the New York Times has no economic stories, which in itself is an improvement from last year, and even its Business section has a story about falling economic barriers in Europe—progress—and holiday sales being too large and overwhelming carriers—progress. The Wall Street Journal has a front page story on the Social Security Administration getting much tougher on disability spending and fraud—also progress.

The problems we worry about today—rising interest rates, sub-par wage growth, the Fed’s exit from the stimulus program—don’t look as big as last year’s problems did, but they are definitely there. I suspect that, when I write this post next year, we will be similarly pleasantly surprised at how much better things are than we had expected.

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