Note: Our office and markets will be closed on Monday in observance of Martin Luther King Day.
Trends suggest direction, tendency, and strength of forces driving events or conditions we consider important enough to observe and track. As we embark on a new year, perhaps it would be useful to check in on some of the major trends impacting our lives and investments.
Economists disagree about how much uncertainty Washington, Europe and other factors have cost the US economy in potential, but most would agree the cost has been significant. As the Federal Reserve has all but exhausted its stimulus measures, Ben Bernanke, Simpson and Bowles, and so many others continue to plead with Washington to strike a bargain and help ignite this economy, only to be answered with mere band aid solutions.
The opening salvos of the deficit war of 2013 have landed with only modest economic and political damage inflicted so far. Mitch McConnell and Joe Biden met under a white flag in the waning hours of 2012 to craft a brief truce to avoid tax hikes that would have crippled the economy. The vast majority of Americans, 99% of them, will keep their current tax rates, though all will see their payroll taxes rise by 2% after a two-year holiday. Unfortunately though, nothing was done to address the nation’s biggest threat – the deficit. The US government still borrows 36 cents of every dollar it spends, at a rate of $1 trillion a year. Those who would change that are ready for a fight.
Years ago, my brother worked for the Naval Air Rework Facility at Marine Airbase Cherry Point, NC. Each year he would tell us incredible stories of how the military handled surplus near the end of a budget year. One of those years he noticed some large bulldozers digging a ditch roughly 25 feet deep and fifty yards long. There was nothing unusual about that sight, until he saw that they were refilling it with brand new diesel generators and a host of other pieces of unused, even boxed equipment. So with the books balanced, they covered them over and drove away.
What's it gonna be fellas?Or a more reasoned approach?
It’s back to the playbook now that House Speaker John Boehner has scrapped his own Plan B. He said he couldn’t muster enough Republicans in his caucus willing to vote for a tax increase – even though it would impact fewer than 1% of Americans. It is also quite likely that those Republicans didn’t see enough spending cuts coming from the White House to agree to a Plan B.
The US economy likely slowed substantially in this current quarter under the weight of political uncertainty. The best clue comes from Federal Reserve Chairman Ben Bernanke who said, “Clearly the fiscal cliff is having effects on the economy," he said, referring to the combination of expiring tax cuts and scheduled spending cuts set to begin early next month. "This is a major risk factor right now.”
President Obama and Speaker Boehner are back behind closed doors after a week of posturing that moved slightly in the president’s favor toward higher taxes. While the president uses every tool he’s got to pound his tax hike position, Republicans try to hold their coalition together while negotiating publically, so far unsuccessfully, with the White House. However, regardless of some openings in Republican ranks, compromise on a cliff-avoiding measure remains a long-shot with strong ideological anchors firmly set on both sides.
Tis the season for crisis in Washington once again. It has become commonplace for our elected leaders to expose their increasingly dysfunctional process by jumping from one emergency to the next. Or is it more functional than first meets the eye? Confusion is a very effective tactic when one wishes to hide the larger truth.
The most debilitating shroud over the economy and likely for months to come remains that of uncertainty. The uncertainty regarding the direction of government policy has been largely answered with the elections, but huge questions remain regarding if and how the fiscal cliff of tax cuts and government spending will be addressed. Senator Bob Corker said "personally, I think the conditions are exactly perfect for us to move ahead with this right now." It is going to take the president being committed to doing this and sitting down and rolling up his sleeves and making it happen." We hope he's right.