- QE-Forever Everywhere and (the lack
of) Inflation
One
of the interesting things about crises is that people’s time horizon reduces
dramatically. The aim for folks (almost
everyone) becomes to try and limit the impact that they’re feeling (or going to
feel) from the crisis, and insulate themselves from the results of the
crisis. For those in power (especially
Central Banks and Governments) this results in a string of short-term focused
decisions, whose sole aim is to end the crisis as quickly as possible so they
can declare their mastery over it. The
downside is that little is done to resolve the underlying problems and it can
result in the economy lurching from one crisis to the next, with each
‘successful’ resolution leaving the system more fragile than before. Some of this can be seen in 2013, which has
started with the proponents of Central Banks beginning to declare victory;
Mario Draghi has been cheered for saving the Euro, the Fed have publicly
committed to continue the QE-experience until either it succeeds (and
unemployment falls to an acceptable level) or it fails (and inflation rises to
an unacceptable level), and it appears like the BoJ will bow to government
pressure and increase QE in an attempt to escape their deflationary trap. Like 2012, the Central Bankers of the world
continue to press the 'sell your bonds, and buy risky assets' line of thinking! This demand and its impact on the psychology
of market participants could well once again prove very supportive to the
markets.
- Can-kicking Government behavior
For
Government’s the politically optimal way of dealing with crises, is to find a
simple quick patch for the problem that pushes the difficult decisions off into
the future (and hopefully, onto other folks) even if it means making the
long-term issues worse. This means
different things in different countries.
In China, where the ‘crisis’ surrounds the potential slowing of economic
growth, the response to any crisis that hints at slower growth (even if it
might result in the rebalancing of the economy, which is a longer-term aim) is
to increase government-sponsored investment even if the cost is greater
overcapacity and a less balance economy.
In Europe, where the crisis revolves around weak government finances,
the response is to create ever more complicated and intricate ways to extend,
encourage or ease funding to the countries in trouble even if the likelihood of
getting a return on that funding is limited, rather than restructuring the
debts that are unlikely to be paid. In
the US, with a tax regime that fails to generate sufficient revenues and a
spending regime dominated by non-discretionary item (defense, medicare, etc)
there’s plenty of scope for short-term fixes (like the fiscal cliff deal) that
do little to help resolve the longer-term imbalances.
- Housing Market
As
we mentioned in 2012’s Glimmers of Hope, the housing market was a potential
source of upside. If you look back at
historical housing crises, it takes 6-8years (on average) for the housing
market to stabilize and start to improve again.
Given that prices peaked in the US back in late-2006, it would suggest
that we’re in the neighborhood of seeing (continued) improving prospects
here. While it’s not clear that that
Government’s & the Fed’s efforts to reduce the problems in housing are
well-thought out, it’s equally clear that any continued stabilization in the
housing markets would unquestionably help both socially and economically.
-
Global Economic Growth
Could 2013 be the year that we
return more sustainably towards trend economic growth. There are certainly some positive signs. In the US, a fiscal deal was agreed and it
appears we’re going to have less uncertainty around the debt-ceiling. In Europe, Draghi has ensured that European
government’s will be able to fund themselves and has bought further time for
them to see if there are any fruits to the austerity programs they’ve been
running. Finally, in Asia, China has
managed to helped stimulate its economy through aggressive bank lending and
Japan is discussing a far more aggressive QE program to help try to boost
growth.
- State and Local Governments
One of the consistent drags on
the US economy since 2008 has been state and local governments, which have
struggled with their own budget woes.
Unlike national governments, they weren’t able to increase deficits as
easily and thus were consistent cutters of spending and jobs. Signs towards the end of 2012 suggested that
this trend is approaching its end and while State/Local governments might not
be positive drivers of the economy going forwards, they will be likely stop
being drags on growth.
- Falling Unemployment (and rising incomes)
Of all the economic data that's out there, these are the two things that Our Man cares the most about - do people have jobs and do those jobs pay decently. While
there’s many flaws in the data (and its computation), it’s also clear that jobs
data in the US is consistently improving, albeit at a slower pace than everyone
(I think) would like. Now perhaps
this improvement slows or reverses later in the year and there are seasonal
biases benefiting the data currently, but the declining trend in unemployment,
positive revisions and increase in hours worked (which will, hopefully, feed
through into incomes) is unquestionably good for the economy! With companies being in a relatively strong
position, if demand continues to hold up well, there is potential for this
favourable trend to continue.
- China & an Asian soft landing
China continues to stimulate their economy whenever there’s the risk of a hard-landing. While the figures and data coming out of China may be questionable, perhaps they’ve just built a better mouse-trap for managing the economy than the rest of us…
China continues to stimulate their economy whenever there’s the risk of a hard-landing. While the figures and data coming out of China may be questionable, perhaps they’ve just built a better mouse-trap for managing the economy than the rest of us…
- Valuation
This is a repeat from prior years’ lists! Our Man continues to mutter that it’s an expensive market (and using longer-term measures it is) but if one only looks at short-term horizons (or uses current year P/E, or mutations of it…such as P/E based on Operating Earnings, or projected forward P/E, etc) then an argument can be made that the market is cheap.
This is a repeat from prior years’ lists! Our Man continues to mutter that it’s an expensive market (and using longer-term measures it is) but if one only looks at short-term horizons (or uses current year P/E, or mutations of it…such as P/E based on Operating Earnings, or projected forward P/E, etc) then an argument can be made that the market is cheap.
