Friday, 21 September 2018

On sequesters, pork barrels and puffed-up equities

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It’s March 1st 2013 – the day upon which the United States of America really does fall off the Fiscal Cliff. After all the drama of January, it is astonishing that so called “sequester” kicks in today with no sign of arc lights and sirens.

Anthony Peters, SwissInvest Strategist

President O’Bama and John Boehner, Republican House Speaker, are due to meet this morning but it seems unlikely that an agreement will be reached and the automatic spending cuts which are on the statute book will now inevitably kick in.

What has astonished me throughout the process so far is the way in which Wall Street has regarded the spending cuts as a threat. Threat? The Federal deficit is out of control, the debt mountain is growing by the day and the wise sages on the Street regard an attempt to bring some order into the system as a threat? So while the Dow is just short of 150 points from its all time high of 14,198.10 which it achieved as a year-end close in 2007, and the equity tribe is dancing in the aisles, the underlying issues have not been resolved.

I am reminded of a comment I wrote in 2009 when I wondered exactly how people thought that the private sector, having been bailed out by the public sector, was going to do the same in return. The economy had been put on a life-support system by way of the mutualisation of defaulted debt as net savers bailed out net debtors. The system could not afford to write the debt off so it was simply transferred from the right pocket to the left pocket. Stock markets seem to reflect some expectation that the private sector will be able to power ahead without the private sector having to return the compliment.

The core argument which the Republicans are putting forward is that the government might have intervened to stop the country from falling into a black hole in 2008 but that one cannot simply continue as though nothing had occurred. I recently estimated that government debt has risen to the tune of US$50,000 per US household in the four years since the President took office in early 2009. An adjustment in the way Washington spends is sorely necessary and it is not, so say the GOP, simply a matter of tinkering around the edges and creating temporary structure. As far as they are concerned, a root and branch review of the role of government is called for. This is where the impasse is. The House majority is of the opinion that the President is refusing to face up to facts.

Peaks and valleys

Either way, assessing equity markets is difficult, if not impossible. Since hitting the low of 6,469.95 pts in March 2009 – Goldman Sachs called that bottom perfectly – the Dow has delivered an annualised return of over 20%. If, however, you go from the top of the bubble in 2001, that figure tumbles sharply to 1.4% annualised return. We can use the charts to prove anything we want – always could do.

I suspect that the effects of the impending sequester are being exaggerated – as these things always are when handed from hysterical politicians to head-line hungry journos – but there is nothing wrong with finally taking some steps to rein in Washington’s love affair with pork barrel politics. Note that “discretionary spending” is top of the list for savings. What effect all this will have on equity values is uncertain but as long as the Fed’s rhetoric of scaling back QE continues or, more to the point, when it really takes hold, the flow of cash from bonds into equities will increase rather than decrease on which basis 15,000 pts is just a matter of time. Stay long.

Meanwhile, here in the UK, in a by-election caused by the resignation from parliament of a disgraced leading Liberal, the highly Eurosceptic (or even Europhobe) UK Independence Party (UKIP) pushed Cameron’s Conservative candidate into 3rd place. That should especially please Europhiles as it reinforces the probability of the Tories losing the next election and the referendum on EU membership dying in the process. How about that?


Alas, it is that time of the week again. All that remains for me is to wish you and yours a happy and peaceful week-end. May you enjoy the arrival of March and the knowledge that Spring is now truly just around the corner while cautiously bearing in mind that the darned winter fuel bill has yet to arrive. Yikes!    

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