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.

— 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.

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.

Volatility in financial markets

— Guest post from Peter Essele, senior investment research analyst

On November 13, I wrote about the richness of the closed-end marketplace due to strong investor demand. At the time, I mentioned that approximately 60 percent of taxable closed-end funds were trading at a premium to net asset value (premiums occur when the price paid in the open market for a particular fund is greater than the value of the underlying securities), which was the highest level ever recorded. In addition, the post stated that, based on historical relationships in this market, these aberrations often don’t persist for extended periods of time. My goal was to highlight the current dislocations that existed and to warn investors regarding a possible correction. Two days later, the number of funds trading at a premium in this particular market went from approximately 60 percent to less than 20 percent, as investors shed these securities at an aggressive pace. In some cases, investors lost more than 6 percent in a matter of days from securities that they believed to be high-yielding “bond” funds.

I’ve previously referred to a “confidence disconnect” between consumers and business, and it seems to be continuing. Depending on which stats you look at, sales over the weekend increased between 6 percent and 13 percent over last year, which indicates that consumers are still pulling out their wallets and supporting the economy. But from a business standpoint, although the numbers are quite good at the surface, they may not be as good as they seem.

Several factors make the strong top-line numbers less positive from a business standpoint. The first, and potentially most significant, has to do with whether the sales are profitable. Given the wide range of deals and discounts employed to get buyers to make a purchase, profitability took a hit last year—and it may this year as well. The second is whether strong sales over the kick-off weekend will augur similarly strong results over the entire holiday season, or whether retailers have merely succeeded in bringing sales forward rather than increasing them overall. Evidence from past years runs both ways, and the effect on Black Friday itself was negative, as earlier store openings on Thanksgiving seem merely to have led people to start shopping sooner rather than to buy more goods. The National Retail Federation projects overall sales will increase 4.1 percent this year, which is relatively strong, but it’s less than last year’s 5.6-percent increase.

Hurricane Sandy was one of the largest storms ever to strike the United States, and, because of its path up the East Coast and into the country, it hit areas that are rarely affected by hurricanes. As a result of both of these factors, combined with the timing of the landfall and the tide, the damage was extensive and serious.

Nothing concrete to report on today, but the discussion continues to get more interesting. One article in particular that is worth a look is an op-ed piece on page 9 of the Financial Times (FT), “How the US should avoid falling off the fiscal cliff.” It was written by Glenn Hubbard, current dean of Columbia Business School, former chairman of George W. Bush’s Council of Economic Advisers, and an economic consultant to the Romney campaign. He has some credibility when it comes to representing the Republican economic point of view.

And his points are both largely typical of that point of view and economically sensible—raising revenue is about raising average tax rates, not marginal rates; spending cuts should be a larger part of the solution than tax increases for growth reasons. It’s when you take a closer look at the details that it gets interesting. Let’s go to some direct quotes. Hubbard writes:

• “There are ways to raise revenue without increasing marginal rates. Tax deductions should be scaled back, especially in the areas of mortgage interest, charitable giving, and employer provided health insurance.”
• “The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should come first from these individuals. This means closing loopholes.” He then goes on to discuss limiting deductions overall.

On this metric, the U.S. is poised for success. The Wall Street Journal (WSJ), New York Times (NYT), and Financial Times (FT) all have stories on the International Energy Agency’s new World Energy Outlook 2012, which reports that the U.S. will be the largest producer of oil in the world by 2020 and a net oil exporter by around 2030. The story made the front page of both the WSJ, with “US Redraws World Oil Map,” and the FT, with “US to be world’s top energy producer,” but it only made it to page B6 in the NYT. Tells you something right there.

The headline story is great and underlines the point I have been making for a while that things are changing. The oil and gas industry is creating U.S. jobs directly, and it will do so indirectly as well by providing a lower cost base for manufacturers. In fact, last week the FT reported that German industrial companies are formally warning that they expect to lose jobs because of it.

One of my major reasons for cheer about the U.S. economy has been the evolving energy situation. Breakthroughs in oil and gas drilling have made U.S. prices for natural gas the world’s lowest and have started us on the road to again becoming the world’s largest producer of oil, as well as potentially making us energy independent.

Beyond that, though, we are developing other energy-producing technologies that are more sustainable and more diversified. I have debates with friends about the role these will play going forward, but, in my opinion, there’s no doubt that having the technologies developed makes us more secure. There’s nothing like having a backup plan.