The big daddy that so many forecasts are based around is the US economy – why – well the US represents around 21% of the global economy. Whichever way you splice and dice the US economy, everything about it is huge. I love the US – as a matter of fact, I love all of the countries we have put articles out on this year, having spent quality time in each of them.
Clearly the major headline facing the US economy is the so called fiscal cliff. Word from my sources suggests that this is more likely to be a fiscal slope – and this is coming from the most senior level in both Government and Investment Banking, who between them, it could be argued, run the US.
Given the gravity of the situation, Congress will meet closer to the middle ground, and have things moving forward, rather than the political impasse which plagued the Obama government’s health reform bill. It has even been suggested the deal is done, at least verbally, and will be signed off mid next year. Anyone in business knows that “a cheque in the post” is worthless, but it would seem that is the story – time will tell. Clearly however, there is a need for immediate change in the tax/spending regime.
The difficulty here is not votes – that ship has sailed and wont be an issue for another three years (thank goodness), instead is the overall sluggishness in the economy. When business is brisk, housing markets charging, unemployment low and all of the good things that you may, as a distant memory, recall were in place for the 4 or 5 years prior to 2008, collecting tax is relatively easy, and as a government, you can even afford to loosen things and give some concessions. Not right now – every cent counts, especially when more of your population is employed by the Government.
The stats for government employees vary massively (numbers never lie) between 8 and 19%. It should always be considered that a Government job is a cost ie is paid for by the tax payer, as opposed to offering an economic benefit. At the same time, if we wish to live in a civilisation, where for example there is law and order, such roles are also critical. As such, while the popular vote may be to cut public spending, people still expect schools, policing, garbage collection and so on.
Retail spending is a massive component within the US economy. Headline to headline, we have seen consumers and their confidence buffeted around. Just last week, we saw December confidence “plunged” to its lowest level in four months. Is that such a bad thing, as we all see the negative headlines?
In reality, this is likely to be a short term blip (hence the dangers of being a headline trader) as consumers most likely are digesting the prospect of higher taxes, while in addition the impact of Hurricane Sandy (something that most have probably forgotten by now) would also have had an effect on the survey and spending figures. Overall, retail spending is a key benchmark – watched by all, as it is a bellwether indicator on the general state of the economy. With such low interest rates (having less incentive to save) should in theory be providing a boost for spending, but given 5 years of economic slowdown (I didn’t say recession) that rainy day is here for many.
The lower levels of interest rates and massive increase in money supply, should continue to hold the dollar at lower levels. This weaker dollar backdrop can only be a good thing for the US economy. It makes America’s exports more competitive on the world stage, conversely, imports more expensive and most importantly may help resuscitate the down-trodden manufacturing sector. All of which would have to be viewed as a positive (unless you are holding US dollar denominated assets, in which case their value has been eroded considerably – think overseas owners of US Treasuries). Equally, real assets, such as gold, would need to move up price wise, in order to maintain their relative purchasing power, and hence our view on gold. We would expect the US dollar to remain relatively weak – at close to current levels vs the major crosses.
In terms of the performance of equity markets, we expect to see further growth from the US market. We do not however, expect this to be smooth sailing. A correction of 10-15% is not out of the question – the catalyst for which may be more global in nature (Europe/Euro issues, Middle Eastern tensions or China/Japan territorial dispute). That said, we would expect a reasonably swift recovery, with equity markets at higher than current levels over the next 12 months.
Why, because the wheels are turning, the lights are on, the shoots are green (running out of clichés ) and ultimately, despite the toxic aftershock of the GFC, Mortgage Backed Securities, Sub Prime Loans and Collateralised Debt Obligations, the massive printing of money and “scattering it from a helicopter” will provide a short term fix for the economy.
However, the far more serious problem is the long term debt crater this policy is creating. Our thoughts on this – well, given this is an outrageous prediction for 2013, perhaps this downside is something that may be something we look at for 2014 and beyond – and herein is the problem. Political agenda and re-election can seem more important than long term stability – with only 4 more years to go in the White House, this problem will be somebody else’s mess to clear up – and to be fair to President Obama, the cause of the problem in the first place can be laid squarely at the feet of his predecessors’ – basically from Clinton on.
To really throw the cat amongst the pigeons, if we look at the less Democratic world, in China, the premier is in office for ten years – long enough to make change, rather than have to focus on re-election. Better yet, take a look at Singapore, where economic stability, stellar growth, low/zero crime, exceptional health care, massive quality of life and low taxes are all achieved, albeit without the democratic process.
Just throwing that in there, but what can we learn from the East, I wonder?
Yes, I know, we have our democratic rights – but for those living here in Australia, right now, we have a twice serving Prime Minister who, technically, has never actually been elected by the population – surely that is not a true democracy?