Terry Sawchuk Founder & Chairman
The election is over and as usual, just over half of the country feels like they won and just under half feels like they lost. While Terry and I have our opinions on the election one thing has not changed, our jobs. We will continue to help mitigate risk, evaluate portfolio holdings, monitor the geopolitical landscape, understand the political environment, attempt to anticipate the moves of global central bankers and manage expectations. Times like this I feel I should have earned a Masters Degree in Psychology instead of obtaining my MBA.
Understanding the political environment is one of our primary objectives. It is hard to listen to any kind of news show without hearing about the impending “fiscal cliff”. Ominous, scary and disaster are terms that come to mind when I hear the words “fiscal cliff” but what exactly does it mean? Here is a list of many of the items included as part of the fiscal cliff as reported by the Council on Foreign Relations:
- The Bush Tax cuts expire 12-31-12
- The Social Security payroll tax cut expires 12-31-12
- Research and Experimental tax credits expire 12-31-12
- Affordable Care Act taxes take effect 1-1-13
- The Budget Control Act of 2011 will result in Spending cuts 1-2-13
- Extended Unemployment Benefits expire 12-31-12
- The rate which Medicare pays physicians will decrease nearly 30% 12-31-12
- The debt limit will probably be reached in early 2013
It is easy to understand the confusion many people have over the term fiscal cliff as it is not just 1 single item but a culmination of a series of items all of which appear to have negative consequences to a growing economy. While it appears that disaster is looming, this could be as much political posturing and dare I say fear mongering.
Just this past week the Organization for Economic Cooperation and Development, OECD, cut the US GDP forecast for 2013 from a growth rate of 2.6% down to a growth rate of 2.0%. They also noted “Economic prospects are very uncertain and highly dependent on the risks associated with the nature and timing of policy decisions.” They also warned that “much stronger additional quantitative easing would be merited”. It appears that anyone with media access is doing their level best to promote whatever their objectives are in the name of the “fiscal cliff”. Reminds me a bit of Y2K.
The OECD also noted that China and Germany in particular should spend more to boost economic activity. Their report suggests that the Euro-zone will remain in or near a recession well into 2013. “The world’s economic fortunes thus hang next year in large part on the ability of political leaders in Europe and the US to deal with a crippling combination of unsustainable debt and cramped business activity.” Is the OECD commentary a glimpse into the crystal ball as to what is to come? It’s impossible to say right now. The cliff looks more like a slope to me, as many of the budget cuts don’t really kick in until well after 2013. The tax increases are just that, but they are not massive increases. Ultimately, Congress has until well after 1-1-13 to address these issues, so don’t be surprised if even after the first month of 2013 you see some kind of concessions made.
The beginning of 2013 appears to be one in which Terry and I will be watching actions of the world’s central bankers and policy makers as the key to managing our portfolios. The more things change, the more they stay the same. For now, we will not be making any changes to our current models. The balance of risks is still there, however, in the very near-term we think the markets are likely to hold the line, and maybe even push a bit higher. We don’t think a significant drop is in the immediate future.
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