The Economy: The election is already ancient news. We now look forward to a new era of political consensus in the U.S. The domestic economic issues facing us can be addressed within the following framework: Democrats have the White House, the Senate, the Fed and now the Supreme Court. The Republicans have the House. We expect the economic policies of the past 4-years to be maintained. This means low interest rates, more pump priming by The Fed and continued implementation of financial regulation through Dodd-Frank. Obamacare is also here to stay. The unintended consequences of both these game-changing pieces of legislation have yet to be felt. American business will make the necessary adjustments to survive. We are optimistic that the Fiscal Cliff will be addressed with the proviso that taxes will go up in 2013 regardless. As we have stated before, we believe that after years of low taxes, the US has entered a period where taxes will consistently be raised in order to deal with local, state and national debt. The last time the U.S. faced these debt levels was after WWII. Taxes were raised for years; ultimately reaching more than 90% for upper income tax brackets. The long-term implications of increasing taxes will impact all economic activity. Plan accordingly. Remember, it’s not what you make; it’s what you keep.
Food for Thought: Risk management requires planning and timely action. We are staunch advocates of taking profits. The recent market sell-off has caused alarm bells to ring. Though U.S. equity markets typically rally into year-end, their dramatic appreciation since June might make this year the exception. Apple (AAPL), which has lent outsized support to the S&P 500, is now down 20% from its high and has entered a bear market. With a weakening global economy and higher taxes on the horizon, we are moving to the sidelines and becoming more defensive.
The Economy: New month, new an positive economic data and for many, Hurricane Sandy is yesterday’s news and already forgotten. The elections are in 5-days which is an eternity in the future and everything is beautiful. Initial estimates on the damage from Hurricane Sandy range from $50-$100 billion. This will match or exceed the damage from Katrina in 2005. It will take weeks for the damage to be fully assessed. Talking heads are split over whether this event will be good or bad for the economy. They are equally split as to whether this will allow Bernanke to ease off the gas pedal. The storm closed US financial markets on Monday and Tuesday. No one is paying much attention to what’s happening in the rest of the world. The economy in the U.S. expanded more than forecast in the third quarter, paced by a pickup in consumer spending, a rebound in government outlays and gains in residential construction. Gross domestic product rose at a 2 percent annual rate after climbing 1.3 percent in the prior quarter. A housing rebound appears to be helping mend Americans’ finances and confidence, indicating the pickup in demand for expensive items such as automobiles can be sustained. The data was expected to play a role in the upcoming election. However, Sandy, also known as Frankenstorm will obscure the data as election disruptions from the storm are expected to be widespread.
Food for Thought: Frankenstorm focuses our attention on the old saying, “Men (and women) plan; the gods laugh.” Part of success in life is pure luck. Years of hard work and careful planning can be wiped out in an instant. In San Diego we benefit from tourism, the military and health sciences. The election will impact all areas of our economy; some for the better, some for the worse. As we near year end we encourage you to update your wills, trusts, other legal documents and review your investments. Are you on track?
Helpful Hint: Our commentary on the global economy may be confusing. Please cut and paste this URL into your browser for helpful visuals. Move your cursor to the 1:20 minute mark on the video to jump straight to the action.http://www.youtube.com/watch?feature=player_embedded&v=NIHfsbrBpFU
The Economy: Politics trump economics. The U.S. elections dominate. Sure, Greece has been given a 2-year extension. Sure, Spanish downgrades are ongoing. Sure, the IMF has lowered its global growth forecast to its lowest since 2009. Sure, the Italian courts have given us new ideals of justice that rival those dealt to Pussy Riot. No matter. U.S. elections dominate. The Fed wraps up their 2-day meeting today with an improving housing market. We’re going to press without waiting for their closing statements. With 2-weeks remaining before the elections, there won’t be anything of note today from Bennie and the Boys. Bennie has indicated to friends that he’s not interested in being reappointed when his term is up. Is this a modern Cincinnatus or just another functionary burned-out on the toxicity of banking life in the Age of Aquarius? As if reflecting all this ennui, global markets have hit an air pocket recently. Volatility has returned with huge intra-day swings in everything from stocks and commodities to alternative investments. The Bulls say this is the storm before the calm; the calm resumption of upward moves to infinity and beyond. The Bears say this is the calm before the storm as precession morphs to crisis after the elections. Pick your poison.
Food For Thought: Regardless of who wins the White House, your taxes are going up. Deal With It. There is no support, on either side of the aisle for continuing the payroll tax break. The increase will cost the average taxpayer $1000 a year in additional taxes. For a two wage earner family making 6-figures, the increase in taxes will be almost $5000 a year. Not to worry. This won’t have any impact on the economy. Bennie will keep interest rates low and Americans will be able to put these increased taxes on their credit cards. Next, they’ll be able to refinance their 3.8% mortgages into 3.76% mortgages to absorb the additional debt load. Then they’ll be able to spend more to support the economy by shifting their 18% credit card debt to the 0% teaser rates for 90-days. In our age of Central Bank Enlightenment, the sure-fire way to get out of debt is to pile on more debt. Since a tax increase means that people will have more to spend, the economy will boom. Yep, just watch.
The Economy: Last week was Gloom and Doom, this week is Euphoria as observers and participants suffer vertigo. Optimism comes from the hoped-for Spanish bailout as 2 German lawmakers have indicated there is support for some type of credit mechanism to ease the crunch. In addition to the news from Europe, Housing Starts have hit a post-recession high in September. Global stock markets are in rally mode as earnings are beating lowered expectations. The economic numbers that are being released continue to be mixed while confirming the “New Normal.” The New Normal remains the framework of global slow growth as high debt, technology and demographics impact banks, governments and businesses. The slowdown in developed economies is causing a slowdown in the export driven economies from Asia to South America. For example, Intel beat earnings estimates but has warned that the shift away from traditional computers has put their manufacturing base on course for its first decline in more than 10-years. Regardless of the election results, there is no magic wand. More time must pass before the path is revealed.
Food for Thought: Global banks have been saved from extinction by the determined efforts of Central Bankers. But the Zero Interest Rate Policy (ZIRP) is cutting into profitability. While the mainstream media speaks of loosened lending standards, business owners and executives tell us that funding of all types remains difficult to obtain. Multinationals may be cash rich and benefiting from the low cost of debt, but small business, which represents the bulk of economic growth, continues to find this to be a historic struggle. We look across the valley to a brighter future, but getting there will require determination, prudence and independent thinking. Everyone understands that Bernanke is trying to force investors into riskier assets. But with many facing retirement or crushing debt, The idea of assuming more risk is unappealing. History has taught us that when global confusion reigns, a new era may be on the doorstep. We believe that we remain in transition from an old economic order to a new. Free trade and capitalism will look different when we emerge from this transition. State Capitalism appears to be part of this new order as exemplified by China. Currency Wars can be seen as the new tariffs. In this brave new world, preserving capital is more important than ever.
The Economy: Last week Unemployment fell to 7.8% from 8.1%. Cheers and jeers were heard. Jack Welch, the retired head of General Electric, went so far as to Twitter that the numbers were cooked to benefit the Obama Administration. This is another indication of how polarized American politics has become. Like Janus, everyone is cast with two faces: Savior or Satan. Greece and Spain are back in the news after a welcome hiatus. Merkel visited Greece to be met with burning Nazi flags and shock troops to control protesters. Spain’s debt rating was cut by S&P to one level above junk. Jobless claims dropped today but the numbers are viewed with suspicion since one state accounted for almost the entire drop. But politics trumps economics as we all grid for the media circus of the Veep Debates tonight.
Food for Thought: Bill hosted his annual Cruise on San Diego Bay yesterday. The three hour event was attended by 14 of San Diego’s elite. The Gods who had been given their marching orders, duly swept aside the rain clouds and stood sentinel for the duration. The consensus from the conversations was that we’re on global hold until after the US elections. The fires of political crisis are banked. Economic resolution is idling. Give it another month and we’ll start to see renewed momentum across the political and economic spectrum.
The Economy: Uncertainty has been reduced in our outlook. Last week the Israeli Prime Minister gave his “red line in the sand” speech about the Iranian nuke program. The implication was that an Israeli unilateral strike against Iran would be put off until spring 2013. This is taking pressure off rising oil prices. Spain reported their bank stress tests. All banks passed; though we question the validity of any test with a 100% pass rate. Slowing global growth was again confirmed with U.S. durable goods dropping 13% for August. This was followed by final estimates for Q2 GDP which was revised downward to an annualized 1.3%. This morning the unemployment rate unexpectedly fell to 7.8% from 8.1%. The conflicting economic numbers continue to confound optimists, pessimists and conspiracy theorists. If your neighbor loses his job, it’s a recession. If you lose your job, it’s a depression. The silver lining to global economic news confirming a slowdown is that it allows for greater confidence in planning for the future. Decisions to hold ‘em or fold ‘em can be made with greater certainty. Understanding where we are in the economic cycle creates opportunity for both aggressive moves as well as defensive strategies. We’re eternal optimists but when if it’s raining outside, we’ll grab an umbrella or just stay put by the roaring fire in the hearth.
Food for Thought: The San Diego economy continues to grow in spite of the global slowdown. Many of our privately owned local companies report that revenues are up almost 20% over last year. Privately held construction, defense, med-tech and consumer products companies lead the way. Consumer confidence in San Diego continues to rise as local residential real estate has stabilized. Record low interest rates are fueling refinancings. The rising stock markets have also helped. At Higgins Capital we continue to see opportunity in defensive sectors. With the elections followed by the Fiscal Cliff, we are taking profits. Contact us if we can help you with your investing or financial planning.
The Economy: Saber rattling has become de rigueur: China and Japan engage in fishboat diplomacy over goat infested islands; Europeans riot over austerity; Middle East blowhards shadow box. Waiting for Godot. Domestically, everything’s swell. Economic data shows a housing market that may or may not be improving … depending on the mixed data. Yesterday’s consumer confidence number took a dramatic upturn. The President of the Minneapolis Federal Reserve Bank has proposed that the Fed publically state that it will continue to stimulate the economy until the unemployment rate reaches 5.5% or inflation rises to 2.25%. This statement is valuable for its indication of the continuous move by the Fed towards increased transparency. The ability for business to plan for a stable interest rate environment is beneficial. The Fed has clearly made job-creation its number one priority.
Food for Thought: Is Big Ben Bernanke Messiah or Mephistopheles? Love him or hate him, he is out front leading while our elected officials stumble around in the dark like so many unruly children playing a deadly, blind game of pin the tail on the donkey (or elephant). Fiscal Cliff? As we used to say in the Navy, “Lead, follow or get the hell out of the way!” So is Bernanke, Washington at Trenton or is he Custer at the Little Big Horn? This has been a bizzaro world where bad news is good news and good news is bad. Yesterday was a case in point: good news from housing and consumer confidence but the stock market had its worst day in weeks. Today we had bad news from housing and the stock market was down again. Jeff Gundlach, Doubleline’s superstar manager recently said, “One of these days we will exit this strange set of circumstances. When we do, you’re going to see very substantial ramifications … . Quoting Mark Antony in “The Life and Death of Julius Caesar,” Gundlach said, “If you have tears, prepare to shed them now.”
The Economy: The past two weeks could be the most important of 2012. From China and Japan to Europe and the U.S., central bankers and governments have implemented massive new efforts to reflate the slowing global economy. The common thread is that these are open-ended spending programs. Critics claim these are continuations of programs that have already proven to be ineffective. Supporters claim that the programs have prevented a bad situation from getting worse. Economic data remains weak which gives both sides some credibility. Time will tell.
Food for Thought: Planned defense cutbacks are already roiling San Diego businesses and investors. The 10-15% cutbacks are being viewed with apprehension regardless of the industry. But San Diego County’s diversified economy should fare better than most other locations. The Fed’s decision to extend QE3 to infinity is based on the theory of the wealth effect. This is the theory that by inflating some assets prices, such as stocks, consumers will read their bank or brokerage statements, feel better about their situations and spend more; thereby boosting the economy. This may already be happening as many businesses report that they are seeing a pickup in activity. Here’s a procotive link for real estate:http://www.businessinsider.com/gary-shilling-no-housing-bottom-in-sight-2012-9
The Economy: The global economic and political environment continues to get more confused as we move towards year end. Resolution of the European debt crisis was supposed to be clarified by the German Supreme Court today. In our opinion the ruling has only muddied the waters and again, kicked-the-can-down-the-road. Tomorrow the Fed is expected to announce some form of further easing. Whether you call it QE3 or something else, we expect it to be a decision that will allow both hawks and doves to claim victory. Global Central Bankers are now embracing unconventional policies and “unlimited” solutions. The European Central Bank (ECB) speaks of unlimited bond purchases and lowering the credit quality of the collateral it will accept. The Fed speaks of open-ended Quantitative Easing (QE17?). A joke making the rounds is that the ECB will soon be accepting used bicycles as collateral, then marking them up to the value of a Rolls Royce. Regardless of the endless reassurances that things are getting better, the proposed solutions are increasingly complicated and conditional. Consider the following: First a question: Whatever happened to the elegance of simplicity? Alexander showed us the way with the Gordian knot. Second, Einstein defined Insanity as doing the same thing over and over again and expecting different results.
Food for Thought: Today we laugh at witch doctors reading goat entrails and performing rain dances. But it looks to us like Central Bankers are the new shamans and confidence men. Here’s a novel thought. Rather than continuing to prop up busted banks and bankrupt sovereigns, let ‘em go. Let the too-big-to-fail, fail. Let countries default and devalue. Let stock markets reflect economic reality not central bank liquidity injections. The world won’t come to an end. There will be winners and losers just as there are in today’s manipulated environment. When the dust clears our grandchildren won’t be burdened with the sin of unserviceable debt and the global economy may be reinvigorated.
The Economy: Against a background of mixed economic numbers, Bernanke’s Jackson Hole speech last Friday left the door open for more easing at the mid-September FOMC meeting. This was expected as the European Central Bank meets tomorrow and is expected to announce major initiatives to shore-up failing economies there. Contrary to assurances that Greece will be kept in the EU, many global companies are establishing procedures for its eventual departure. Some processes are being created to accommodate Greece’s return to the drachma. Some companies are insisting on full payment in advance. Despite this planning, the impact of a Greek departure is unknowable. While governments and central bankers have had years to evaluate this situation, unintended consequences remain.
Food for Thought: A USD economic index shows that the San Diego economy has expanded for the ninth month in a row. Though gains remain modest, the outlook is for continued solid growth. The San Diego Business Journal reports that the county avocado crop had a cash value of $1.7 billion. The county continues to benefit from it diverse business mix of agriculture, military and technology. There’s little doubt that better economic times will return. In the interim, retirement plans and investment portfolios will continue to be affected by global events.