With the semiannual reviews about to go out, it is a good time to review some thoughts considering the state of the economy, the markets and what we can expect for the rest of 2012. Currently, the equity market has many issues that continue to weigh against a major gain in the next few months. The issues are the following:
1) Uncertainty in the tax code. As of January tax rates return to 2000 levels; all professionals and politicians agree that in a recession this is bad, but the polarized Democrats and Republicans cannot agree to a fix. Due to this uncertainty, economic activity is decreasing.
2) Overseas the Sovereign Debt crisis is engulfing the Euro Zone, which may lead to Greece exiting the Euro and because the results of that departure is unknown, markets are jittery and economic activity is decreasing.
3) China’s economy continues to be strongly influenced by exports and with the global slowdown its economy is slowing manifesting as decreased demand for most commodities. India’s economy has been slowing down for the past two years and now is growing slower than needed to create jobs for those entering the country’s workforce.
4) The United States has a debt ceiling issue that will probably come up just after the new year. It is uncertain whether the economy will slow down as it did last time because of the ambiguity over whether the government would shut down prior to a debt resolution.
5) In the fall, if there is not a budget accord there is an automatic sequestration. It is believed that the effect of sequestration would throw the US economy into recession even without all the other listed uncertainties.
6) Currently, we have regulations that have not solved the various issues government desires, but each set of regulations has slowed the economy by making the US less competitive. For example, we have Sarbanes Oxley which was supposed to stop corporation shenanigans by hitting executives with criminal offenses for misleading the public. With the 2008 meltdown, the government has found numerous corporations who mislead the public with the most egregious being Lehman Brothers and Countrywide Mortgage. In both cases fraud was found, but not one individual has been prosecuted under Sarbanes Oxley to date. Economists estimate that the cost of this law and its regulations are around $120 billion, resulting in the number of companies that have gone public declining by two thirds since the law was enacted. An illustration it the health care Act enacted in 2010, which increases the number of health care procedure categories from approximately 14,000 to 188,000. The cost to administer this change alone is estimated at double the current costs. Yet, there is no discussion about the huge cost of this legislation. On July 17th Marc Andreessen was interviewed by Julia Boorstin on CNBC and when it comes to the presidential election, Andreessen says that though he’s “generally a fan” of President Obama, and was a supporter in 2008, now he’s “more pro-Romney.” He indicated that he believes a Republican administration would be “considerably more open on regulatory issues, and the markets would be more competitive under a Romney administration.”
7) US cities and states continue to struggle with excess spending, increasing debt and too little revenues to pay for all the expenses. In 2002, we’ve had three municipalities declare bankruptcy and several more are considering it. The states of California and Illinois appear to be in the worst shape.
8) Housing continues to be a drag on our economy and the foreclosure mess has yet to be resolved.
The good news for the economy is that US households have reduced debt dramatically and corporations continue to strengthen their balance sheet. When there is more transparency in policy, the US is probably poised to lead the world out of its current economic slowdown. The problem is that our political leaders are more interested in worsening the crisis for political gain. With all this uncertainty we suspect that interest rates will continue to hover around their historic lows for as long as the current uncertainty continues. That may mean that we will enter the November elections before clarity is provided and the stock markets both in the US and abroad will fall further, while US Treasuries will continue to show strength. As a result, we remain cautious for the remainder of 2012 until we see more transparency from our leaders!
