Gridlock Drives the U.S. to the Fiscal Cliff
• My “back of the envelope” calculation: U.S. recession vulnerability will reach its height 18 months from now, in late Q4 2013
• Investors should NOT make any significant changes to their portfolios based on the current economic evidence:
o Current evidence supports further asset appreciation (equities and corporate bonds) and a U.S. economy that is the “best in breed’ of all global economies
o My near-term expectation is “this pause will refresh”
• A reallocation out of U.S. Treasuries into equities remains a possibility for 2012, although not near term
• The current trajectory is for a “late cycle U.S. economic recovery” with sustainability over the next few quarters
• The catalyst that would drive the U.S. back into recession is simple – Gridlock in Washington D.C.
Avoid the Mistake, Avoid a Late 2013 Recession
The U.S. is in the midst of a presidential campaign season that is being depicted by the media in an extremely polarizing fashion. Of greater concern is the evidence that suggests an electorate that is disinterested with the election so far. Historically, U.S. electorate participation is necessary to motivate policymakers to address fiscal challenges to the U.S. economy.
The U.S. economy will be faced at the end of 2012 with the expiration of the payroll tax cut, unemployment benefits, and automatic spending cuts as a result of the Super Committee’s failure to resolve these issues. Lack of desire on the part of both Republicans and Democrats to address these issues during an election campaign will not negatively impact U.S. economic growth immediately, but it will weaken the economy’s foundation and directly impact it in mid to late 2013.
A failure to act could remove 1% to 1.5% from U.S. GDP. In particular, corporate earnings strength, the foundation of the post-2009 recovery, will be placed in an uncomfortable position. House prices will also begin a renewed leg lower. I suspect that Treasuries would trade more in line with the 1981 to mid-1982 scenario than the 2008 to 2009 scenario.
For those that have kept up with my thought process, market bias, and economic outlooks, you know of my stated bullish position in the past few years. I write this not for investors to take action with their current portfolios nor to reverse the optimism. Rather, I write this to introduce a concern and potential market headwind, which is based on the lack of adult supervision in D.C. and very quietly places in jeopardy the U.S. economic recovery and current immunity from recession if not rectified.
D.C. and the U.S. electorate need to wake up and realize how fortunate we are relative to the rest of the global economies. We control whether we continue to steer toward further asset appreciation or if we lazily turn toward the fiscal cliff. This is not the time to let up, and it seems we are. I hope I am wrong, and that the electorate begins to demand more from D.C. , policy makers act unselfishly, and the U.S. remains best in breed.
A message to Washington D.C. – These are historic times, laziness has severe consequences, and “For 365 days a year, it’s Game 7.” Please remember that!