12/31/12 – Here We Go

December 31, 2012

At the end, when all’s said and done, much more is said than done. Today, the deadline for averting the fiscal cliff, we certainly see that in spades.

It’s not the end of the world—that will be next year, if Congress refuses to raise the debt limit and the U.S. defaults—but it isn’t good.

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12/28/12 - The Anti-Incumbent Party

December 28, 2012

The stories today are all around the fiscal cliff, of course, and the woeful inability of Congress to accomplish anything other than trying to shift the blame. One of the most annoying memes is how annoyed the representatives are to be stuck in Washington over the holidays.

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12/27/12 - Back to DEFCON 1?

December 27, 2012

Back in 2011, during the last debt ceiling debate, the U.S. went into what could reasonably be described as potential default territory. We are nowhere near as close to that as we were then, but we are starting the downward slide, with Treasury Secretary Tim Geithner quoted over the weekend as saying that we will hit the federal borrowing limit on Monday (i.e., New Year’s Eve), which is to say in a couple days.

At that point, the Treasury will start to take certain “emergency” measures—I put that in quotation marks because we were here in 2012, and the only emergency is Congress’s unwillingness to act—which will allow the government to pay its bills for a limited time, probably a couple months, and avoid a full-blown debt crisis for that period. Timing is uncertain because it depends largely on the tax and spending agreements reached with respect to the fiscal cliff. How much money is raised and spent will be critical in determining how long the Treasury can juggle bill payments. We won’t know that until—and if—Congress acts on the fiscal cliff.

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12/26/12 - The Germans Will Solve the Euro Problem

December 26, 2012

I have renewed confidence about the ability of the Germans to solve any and all problems associated with the euro, after spending several hours yesterday building a play castle for my son.

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12/24/12 - Christmas Cheer

December 24, 2012

I have always loved Christmas. But as I grew older, as much as I loved it, I think I lost much of the spirit. Now that I have a four-year-old son—who is wrestling with the stress of being good under the eye of the “Elf on the Shelf,” eying presents under the tree, and baking cookies with his mom—I find myself recovering much of what I had lost. This is wonderful, but, as a father, I also find myself reaching deeper into the meaning of the holiday.

The idea of sacrifice is at the heart of both Judaism and Christianity, and the notion of a father sacrificing his son is fundamental. Christmas itself, where the Christ child is born into the world, is the start of just that sacrifice. I literally cannot fathom making that kind of sacrifice—of giving up my son. At the same time, I understand just how much I would sacrifice for him.

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12/21/12 – Sale of the NYSE Reflects a Changing World

December 21, 2012

I just finished a book on nuclear strategy in the post-Cold War era and have been planning to review it. I will still do so, probably next week, but find myself somewhat overtaken by events, as many of the points the book makes, and that I wanted to highlight, are critical to the just-announced sale of the New York Stock Exchange. Bear with me as I walk through some of them.

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12/21/12 – Over the Cliff?

December 21, 2012

“If Boehner can’t bring his plan B to a vote and win, he probably won’t be able to successfully sell any more comprehensive deal—and we go off the cliff.”

The quote above is from yesterday’s post. As you may have noticed, the world didn’t end last night, although it has changed significantly per that quote. Speaker Boehner could not bring his plan B to a vote—he pulled it once it was clear he didn’t have the votes—much less pass it, and now the complexion of the negotiations has changed again.

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12/21/12 - Outlook 2013: The Economy Returns to Normalcy - The Fiscal Cliff (Part 4)

December 21, 2012

All of the preceding analysis is based on the assumption that the fiscal cliff is averted and that a deal, which phases in any tax increases and spending cuts over time, rather than imposing them all on January 1, is cut.

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12/20/12 – Goodbye, and Thank You

December 20, 2012

Seeing as the world will be ending tonight, that seems to be the only appropriate headline. I’ve stocked up on champagne this week; if I have to go, I want to go with a nice demi-sec—Veuve Clicquot, to be exact—and my family around me. There’s another couple of bottles in the refrigerator, just in case we have to wait a bit.

On the other hand, if I don’t have to go, I had better get going on the commentary. In this case, I think the markets are, in fact, a good predictor of the future, as they don’t seem to indicate a significant chance of the world ending. Although they were down a bit yesterday, I would expect a bit more of a sell-off, really, if the world were ending.

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12/20/12 - Outlook 2013: The Economy Returns to Normalcy - 2013 Financial Markets Outlook (Part 3)

December 20, 2012

Fixed income

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12/19/12 - The Bigger Picture

December 19, 2012

Over the past couple of weeks, I have been looking at the day-to-day evolution of the fiscal cliff negotiations and spending quite a bit of time talking about trees. When I did the 2013 outlook series, I did a lot of forest gazing, trying to figure out the bigger picture for the economy and the markets. Now is probably a good time to combine the two and look at the bigger picture of the fiscal cliff and what it means for the U.S. government and economy.

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12/19/12 – Housing Comeback: Demographic Demand Drivers

December 19, 2012

In a previous guest post, Peter Essele pointed out that, on an income basis, housing appears very affordable and that the aggregate price index has tracked quite closely with the sold/for sale ratio. The correlation between the two is quite high, at 0.93, suggesting that they are causally linked, which is certainly reasonable from a fundamental supply/demand standpoint. Peter went on to conclude that these metrics support the continued strong performance of the housing market, although, as more supply has come on the market, the ratio has become less favorable.

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12/19/12 - Outlook 2013: The Economy Returns to Normalcy - The Real Economy in 2013 (Part 2)

December 19, 2012

To try to estimate where the real economy will be in 2013, we must first consider where growth might come from. Consumer spending is approximately 70 percent of the economy, so this will be the first area we consider.

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12/18/12 – Now We’re Talking Price

December 18, 2012

In the fiscal cliff debate, both sides have started to take off the gloves and trade offers. Boehner threw in the first bid, offering to accept higher rates on incomes over $1 million, and Obama said that he might be willing to move the bar above the $250,000 he’d been holding at. Obama’s most recent bid is for a $400,000 threshold. So we’re getting much closer.

On spending cuts, there’s been less progress. The President has ignored a Republican proposal to increase the Medicare eligibility age to 67. Not no progress, though, as Obama did accept a GOP proposal to use a different inflation formula for benefit calculation. This is important because it will result in big cost reductions (and benefit reductions) over time.

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12/18/12 - Outlook 2013: The Economy Returns to Normalcy - Where We Are Now (Part 1)

December 18, 2012

At the end of 2012, the U.S. economy finds itself, almost, at the beginning of a sustainable recovery. Consumer spending has recovered to levels above previous highs and is on par with recoveries from previous recessions. Retail sales are also doing well. The housing market has turned, with most markets reporting price increases year-on-year, and the number of houses for sale in most markets is below historical averages, suggesting that price appreciation will continue.

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12/17/2012 – Housing Comeback

December 17, 2012

Guest post from Peter Essele, senior investment research analyst

One area of the economy that has been making a strong comeback as of late is the housing market. During the depths of the recession, housing was among the most undervalued areas of the investable spectrum, as affordability reached multidecade highs. Countless valuation metrics, including price-to-rent and price-to-median income ratios, moved well beyond the averages witnessed over previous decades. The mindset of investors toward housing went from viewing it as an asset class that never depreciates to believing that it would never recover—all in a matter of years.

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12/17/12 - GOP to Millionaires: Drop Dead!

December 17, 2012

That’s an unfair headline, but what the heck. The big political and economic news in the U.S. this weekend was Speaker Boehner’s offer to allow higher tax rates on those making more than $1 million per year. That at least was the headline. But buried in the proposal was something more significant—an offer to extend the debt ceiling for at least another year or so.

The GOP—at least the portion of it not in safe, gerrymandered districts—is starting to recognize that, if the country does go off the cliff, the Democrats will get a lot of what their base wants—higher taxes, especially on the “rich,” and lower military spending—and the Republicans will get blamed by the Independents. Sure the country will suffer, but from a political point of view it doesn’t get much better than that for the Democrats. Boehner, who is speaking for the wing of the GOP that will be exposed in the next election cycle, is trying to cut a deal—or at least look as if he is doing so. As predicted, this is coming at the last minute.

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12/14/12 – The Economy Slowly Continues to Improve, Despite Washington

December 14, 2012

Probably the best description of a movie I’ve ever read was of Independence Day, a great science fiction B movie. (If you haven’t seen it and you like that sort of thing, take a look.) The description goes, “Space aliens come and destroy Washington, D.C. But later on, it turns out they are hostile.”

I think of that every time I look at the performance of the economy, which is recovering, and then read the headlines about the fiscal cliff negotiations, or lack thereof. There are certainly risks out there that could derail the recovery, but it’s maddening that the biggest one is our own government.

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12/13/12 - Santa Is Real After All—Up to a Point

December 13, 2012

So the big story today is that the Federal Reserve is now explicitly linking its interest rates to U.S. unemployment. It’s kind of the reverse of the Santa revelation. Remember when you found out that Santa wasn’t real? How you kind of knew it but weren’t happy to have it confirmed? Now we kind of knew that the Fed was keying on unemployment, but again we’re not all that happy to have it confirmed.

The story made the front pages of the Financial Times, the Wall Street Journal, and the New York Times, in all cases above the fold. So in the eyes of the mainstream—and especially the financial—media, this is a big deal. I agree, for a change. The Fed has explicitly moved toward supporting the real economy, in employment, and away from supporting the financial economy, with inflation. Clearly, it is worried more about the former than the latter.

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12/12/12 – Twilight of the Unions?

December 12, 2012

The primary story today is the imposition of restrictions on unions in Michigan, home of the United Auto Workers and once seen as a mainstay of the union movement. This news hit the front pages of the Wall Street Journal, with “Unions Dealt Blow in UAW’s Home State,” and the New York Times, with “Limits on Unions Pass in Michigan, Once a Mainstay.”

The story is important for the obvious reasons, such as the continuing erosion of worker power, but it is also important for some less obvious ones. Among these is that the erosion of wage bargaining power makes general price inflation less likely. A key driver of the out-of-control inflation in the U.S. during the 1970s was the wage-price spiral. At the time, wages were indexed to increase with prices, largely through union contracts, and the two fed each other in an increasing spiral. Today, as the membership and power of unions erode, wage-price inflation is becoming less of a worry for the economy as a whole.

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12/11/12 - Interesting Things to Read

December 11, 2012

Just a quick note regarding some of the more interesting things I have read recently.

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12/11/12 – Y2.013K?

December 11, 2012

I have spent quite a bit of time reading, thinking, and writing about the fiscal cliff, going into its potential risks and damage in some depth. While it’s certainly appropriate to analyze the situation, something occurred to me the other day: Could this be another Y2K?

You may remember it—the disaster that didn’t happen. Despite the predictions of nuclear power stations melting down and airliners dropping from the sky, the millennial New Year celebrations went just fine, and the world was still there the next day.

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12/10/12 – Update on the Rest of the World

December 10, 2012

Recently, my posts have focused on the U.S., as that’s where most of the news has been, but I wanted to take a look at the rest of the world. Although nothing particularly urgent is happening, many issues we have discussed before continue to cook.

Europe

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12/10/12 – Consumers Start to Get Worried

December 10, 2012

I have written before about the disconnect between consumers, who have been spending as if the fiscal cliff didn’t exist, and business, which has cut back. That disconnect is starting to disappear as consumers become aware of the cliff and what it could mean.

Consumer confidence showed a material drop at the end of last week, due largely to growing public awareness that after-tax incomes will take a hit if the cliff isn’t averted. Other factors included gas prices and the stock market, both of which hit the expectations component. Looking forward, if confidence stays lower, we can expect consumer spending to drop as well—a problem, as it has been a major sustaining element of the recovery. A front-page story in the Wall Street Journal, “Consumer Spending Wobbles,” notes that spending was slower over the summer than previously believed and has continued to weaken into the end of the year.

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12/10/12 – Possible Outcomes of This Week’s Fed Meeting

December 10, 2012

— Fred DeBaets

On Wednesday, we expect the Fed to announce the continuation of Treasury purchases to replace the current maturity extension program, better known as Operation Twist. The Fed will likely grow the balance sheet at a rate of $45 billion per month, maintaining the current pace of purchases. As for the time frame, our best guess is that the new program will end approximately six months prior to the anticipated rate hike, currently projected as mid-2015 by the Fed and early 2016 by the Fed futures market.

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12/7/12 – Re-Shoring Gets a High-Profile Win

December 7, 2012

I have been writing about re-shoring for a while—most recently, yesterday. Today, front-page news in the New York Times and Financial Times, and front-business-page news in the Wall Street Journal, supports that theme in a big way. Apple has decided to start moving production of Macs back to the U.S.

The company plans to invest about $100 million to start manufacturing Macs here, beyond the assembly work it already does. Tim Cook, the CEO, explicitly says that he plans to work with partners to manufacture the full range of components in the computers.

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12/6/12 – Despite the Cliff, Still Lots of Good Out There

December 6, 2012

Today, we will talk a bit about the cliff, but I wanted to lead off with recognition that, despite the short-term risks, there is still a lot of good out there, and the stories keep coming to prove it. A front-page article in the Wall Street Journal, “US Gas Exports Clear Hurdle,” and similar story on the front business page in the New York Times, “Exporting Natural Gas Has Merits, Study Finds,” both talk about a Department of Energy study, which concluded that exporting natural gas would be an economic plus, overall.

Such exports would help enormously with the trade balance; they would also create many jobs for people involved in constructing and operating the infrastructure to facilitate such exports. The costs would include the potential for higher prices domestically, as well as the possible erosion of a domestic cost advantage for manufacturers.

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12/5/12 – Some Thoughts About Going Over the Fiscal Cliff

December 5, 2012

Much of the coverage today is about the difficulties facing the fiscal cliff negotiations. These stories suggest that I may have been premature in thinking the Republicans had fought their own civil war to completion. Although the House Republicans did indeed offer a compromise plan, and the leadership did indeed sign on, the battle still seems to be under way.

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December 2012 Market Thoughts Video

December 5, 2012

[youtube=http://youtu.be/vCh_g-ag2ns?rel=0hd=1]

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Market Update for the Month Ending November 30, 2012

December 4, 2012

Volatility in financial markets

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12/4/12 - SEC Gets Serious on Chinese Company Fraud

December 4, 2012

I wrote in the other post today about the fiscal cliff, which is one front-page story. The other is something that would not normally be considered front-page news—corporate audit policy. What makes this important are the systemic, as well as the geopolitical, implications.

The underlying issue is a conflict between U.S. and Chinese law. U.S. law requires foreign public accounting firms to provide the SEC with the paperwork involving U.S.-traded companies. Chinese law prohibits this.

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12/4/12 – The Other Side Shows Up to the Game

December 4, 2012

Apparently, Obama’s demand that the Republicans come up with a plan had some effect—they did. Not surprisingly, the offer includes much less new revenue than the White House proposal and much larger spending cuts. The New York Times has a pretty good graphic today on page A16 that compares the initial offers.

A few interesting points:

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12/3/12 – On the Other Hand . . .

December 3, 2012

For the past couple of weeks, I have been writing about how I think, ultimately, we will not go over the fiscal cliff. I have based my views on the need for both parties—for their own good and for the good of the country—to actually compromise and solve the problem.

And the need for some sort of deal is increasingly apparent, as I believe, based on the facts at hand, that the damage done to the economy may be well in excess of the 4 percent of GDP that the actual tax increases and spending cuts amount to. About two-thirds of that 4 percent is made up of tax increases; the rest is spending cuts. Economic studies have shown that the multiplier for tax increases is between 2 and 3, while that of spending cuts is between 1 and 2. Combined, using a multiplier of 2.5 for the tax increases and 1.5 for the spending cuts, we might reasonably assume a 7-percent to 8-percent hit to GDP.

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12/3/12 – And One Step Back?

December 3, 2012

Sort of. The White House has made an initial fiscal cliff proposal, which the Republicans have rejected out of hand. The headlines are portraying the Republican dismissal of the proposal as a problem, but the markets seem to be taking it in stride. I suspect the markets are right on this one.

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