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Eric Coffin

Eric Coffin

Eric Coffin has been publishing the HRA newsletters since 1995. During that period, HRA has become famous for in depth coverage, broad hands-on understanding of…

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Stupidity, the Sequel

From The November/December 2012 HRA Journal


It seems like only yesterday. Ok, it seems like sixteen months ago. Are we really going to do this again?

Less than a year and a half after the markets were pummeled by Washington politicians playing chicken they are at it again. So far the markets are taking the situation better but that seems to be mainly because no one really thought the political class would be that stupid. As usual, it seems to be a mistake to overestimate the common sense of politicians of any stripe.

As this is written there are only a few days for the inside the Beltway crowd to avoid the so called Fiscal Cliff. After an election that largely reinforced the status quo it looked like some sort of deal would get done. In the past two weeks those hopes were dashed and the positions of both the Democrats and Republicans in Washington are hardening.

That's not to say a deal is impossible even now. Indeed there is a wide range of spending cut and tax increase/loophole closing combinations that you could get a bipartisan majority to vote for, even if most were holding their nose when they did it. What there isn't by the look of things is a combination at will not tick off a large chunk of one, and probably both, caucuses.

That means that the leaders of those two caucuses, Obama and Boehner, are going to have to have enough guts to take the flack from their own members. That was always going to be the case. It remains to be seen if either or both of those leaders are willing to be leaders in a situation like this.

In the greater scheme of things the scale of cuts and revenue increases being discussed is not huge. We're reminded of the situation in Canada in the 1980's which was much more dire at a fiscal level. In that case conservative politicians enacted a hugely unpopular tax and the liberals that followed them enacted equally unloved spending cuts. The job got done but it took some political bravery on both sides of the House for it to get done. We see little evidence of that in the US. Democrats are trying to ignore an entitlement structure everyone can see is a time bomb. Republicans are shackled by a ridiculous "pledge" that keeps them from being rational about the need to restructure revenue streams.

{For the record, your editor is no more in love with the idea of new taxes than anyone else. Nonetheless, the idea of pledging to never ever raise taxes under any circumstances like some sort of blood oath is ridiculous. Politicians get elected to lead and putting oneself in that inflexible a position based on an oath to an unelected group is not leadership.

Few members of the Conservative government that enacted the GST in Canada loved the idea. They thought the public would hate it and they were right. The party was taken to the woodshed and didn't see a meaningful representation in parliament for almost twenty years. It had to be done however in order to preserve the services the majority of the nation said they wanted. The PM that led the country at the time had his issues but its always seemed to me he should have gotten more credit for the guts that decision surely required. I see very little sign of that sort of nerve in the leadership of either party in Washington.}

So now we are down to the wire, again. If there is no deal by the end of the year the markets are going to react badly. We don't think it would actually be as bad as August 2011. As nasty as the tax rate increases and spending cuts would be without a deal the effects of debt default are much worse. The markets' reaction to the near miss on the debt ceiling deal was appropriate to the seriousness of a debtor country nearly defaulting.

If there was no deal, period, then it's all but certain the US would see a recession early in 2013. That seems much less likely than the idea of no deal by January 1st.

Frankly, if we were Democratic strategists (we're decidedly not) we would recommend "going over the cliff". Spending cuts would be forced, the Bush tax cuts would disappear then all parties could come back to the table. Obama could get the tax increases on higher income he wants and present the deal as a new "Obama tax cut" for 95%+ of the population. Egad!

Poll after poll has made it clear which party will get most of the blame if a deal doesn't happen this month. It boggles the mind that even Tea Party enthusiasts want to set themselves up to be gamed this way. I guess we'll find out who's really bluffing in the next week. While Washington was busy with political farce, China made a much smoother transition from one administration to another.

China has no shortage of issues but here at least there seems to be some pickup in economic growth. That will help the rest of the world economy but China isn't in a position to be the sole driver as it was in early 2009.

Word is that Beijing is targeting a 7.5% growth rate for 2013 and plans to raise rural incomes and push for another urbanization drive at the same time. Sinophobes are predicting disaster but they have been wrong for years and we see no reason to think they won't be again.

We noted in the past couple of issues that the US consumer was more upbeat than anyone expected. This is largely thanks to an improving housing market and four years of personal debt deleveraging. This could change quickly if politicians don' get their act together.

The latest consumer confidence survey released on December 21st showed a large month over month drop in confidence, knocking the measure back to where it was in the spring. It takes no imagination to guess what the cause of this turn was. Partisan stupidity is weighing on the psyche of US spenders again.

The two charts above may be telling and we'll go into them and more in the next issue. Europe hasn't done much lately but the Euro has managed to climb four cents since the US election. Gold hasn't followed the latest Euro up leg as it normally would. Some of that is technical selling after traders didn't get the bounce they hoped for after the last Fed meeting. There was "sell on news" in the gold market since various Fed governors all but pre-announced the move from Operation Twist to more bond buying.

Some of gold losses may be also tax gain selling. It's easy to forget sometimes that gold is one of the most successful assets in the past decade. If one feared an increase in capitals gains rates it would be an obvious choice to take profits on. It's too early to know if that is part of the cause for gold's recent dip. If it is however, gold could get its own bounce soon. Stay Tuned.


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