Before
getting into this week’s note, we wanted to express our sincerest sympathies to
the families affected by the Sandy Hook elementary school shooting. As a father
of two young children, my heart and prayers go out to them.
Fiscal
Policy
The
latest on the fiscal cliff appears to be that both parties are moving closer to
a deal. Speaker Boehner has acquiesced to President Obama’s call for higher tax
rates on the wealthy. While the concept has been accepted, they are still
negotiating the high water mark for these tax rate increases. The Speaker
thinks the appropriate threshold is at those making over $1,000,000 per year.
The President seems to have come up to $400,000.
As
far as spending cuts are concerned, the House wants to see a one-for-one ratio
per increase in taxes. The Speaker is calling for one trillion in cuts vs. 800
billion that the President seeks.
They
are also getting closer in their agreement about extending the debt ceiling.
The President asking for two years of extensions, while the House is willing to
give one year.
That
said, the market has turned significantly higher on the news.
Our
new market stance
While
we are somewhat confused by the market reaction to these details, given the
inherent risks to the economy through bad policy, we are always a student of
the market and shift gears when necessary. We were unsuccessful in our trade, taking our cash and/or short
positions as it seems the Santa Clause rally trumps economic uncertainty.
This
morning our behavioral model turned higher signaling a buying opportunity. We
have abided by the model and have adjusted our portfolio accordingly as the
market is starting to break out.
We
have purchased ETF’s that track the S&P 500, the Nasdaq 100, the Russell
2000 as well as the Dow Jones Industrial Average. We also lightened our
positions in investment grade corporate bonds in our enhanced yield portfolio.
Monetary
Policy
We
are also seeing strength in the market supported by monetary policy as Ben
Bernanke held a press conference last week expanding the likelihood of a full
on monetary press until the unemployment rate falls to 6.5% or inflation rises
to 2.5%. As the Fed goes deeper into uncharted territory, there have been new
concerns on the actual unwinding of these unconventional measures.
This
past weekend, the Wall Street Journal interviewed Leszek Balcerowicz, who is
given a great amount of credit for saving Poland’s economy and setting in place
an age of prosperity. Poland was the only country in the European Union to
avoid recession in 2009 and has been the fastest-growing EU economy since. In
the interview, when asked about our monetary policy in place the WSJ writes,
“As a former central banker, Mr. Balcerowicz struggles to find the appropriate
word for Fed Chairman Ben Bernanke's latest invention:
"Unprecedented," "a complete anathema," "more
uncharted waters." He says such "unconventional" measures trap
economies in an unvirtuous cycle. Bankers expect lower interest rates to spur
growth. When that fails, as in Japan, they have no choice but to stick with
easing.
"While
the benefits of non-conventional [monetary] policies are short lived, the costs
grow with time," he says. "The longer you practice these sorts of
policies, the more difficult it is to exit it. Japan is trapped." Anemic
Japan is the prime example, but now the U.S., Britain and potentially the
European Central Bank are on the same road.”
This
is an excellent interview and I suggest everyone take a look at it.
http://online.wsj.com/article/SB10001424127887323981504578179310418828782.html.
Robin
Harding and the Financial Times opined as well questioning the success of our
unorthodox monetary policy. “The past five years have led central banks to a
revolutionary situation. When the crisis hit, they played their best moves, but
to modest effect. Quantitative easing – the ugly term for buying long-term
assets in order to drive down long-term interest rates – looks radical thanks
to the many-zeroed numbers involved. In reality it is just another way to cut
interest rates.
Monetary
policy, and every other kind of policy, failed to engineer a strong recovery in
advanced economies. Dissatisfaction with that outcome has led central bankers,
spurred on by a healthy dose of external criticism, towards ideas that have
been percolating in academia since Japan’s bubble burst in 1990.”
http://www.ft.com/intl/cms/s/0/cbfae4f4-45e0-11e2-b7ba-00144feabdc0.html#axzz2FQk8DRwP
My “I
can’t believe I just read that moment”
From
time to time I come across articles that blow my mind. Here is one of them. In a Washington Post opinion, Steven Mufson
set forth his solution to our fiscal problems that wouldn’t require raising
taxes or cutting spending.
“The
prospect of once again hitting the federal debt ceiling has provoked the ritual
round of hand-wringing about the intractable nature of this $16 trillion
conundrum. But there is a simple, elegant option that involves no tax
increases, no spending cuts and just a bit of imagination.
Sell
Alaska.
That’s
right. Put the entire state — from Juneau to Deadhorse, from the Bering Strait
to the Beaufort Sea — on the auction block.”
When
asked on his thoughts about the idea, Lt. Governor Mead Treadwell (R) was
reported to say, “He proposed that Alaskans themselves try to buy their state.
I thought it sounded like an employee buyout; Treadwell said he preferred to
think of it as a “citizens’ buyout.” He said, “I don’t think we want to leave
the country to help save it, but if it comes to that, I’m sure we’d bid.””
Joseph
S. Kalinowski, CFA
Twitter:
@jskalinowski
References
http://www.forbes.com/sites/rexsinquefield/2012/12/13/the-feds-black-out-adam-smiths-invisble-hand-of-migration/
http://finance.townhall.com/columnists/mikeshedlock/2012/12/17/is-boehner-capitulating-on-tax-hike-boost-blame-game-posturing-n1468338
http://www.businessinsider.com/boehner-offers-to-push-back-debt-ceiling-for-a-year-2012-12
http://dailycaller.com/2012/12/16/ap-source-boehner-offers-millionaire-tax-hike/
http://thehill.com/business-a-lobbying/272915-steps-to-fiscal-responsibility-
http://www.businessinsider.com/qe-4-folks-this-aint-normal-2012-12
http://www.traderplanet.com/commentaries/view/162880-the-fomc-event-was-entertaining-next-up-cliff-diving/
http://www.foxbusiness.com/economy/2012/12/13/federal-reserve-zombie-economy/
http://www.businessinsider.com/the-fiscal-cliff-chart-thats-making-the-media-look-like-fools-2012-12
http://www.businessinsider.com/credit-suisse-fiscal-cliff-charts-2012-11#president-obama-proposes-that-only-the-highest-income-earners-see-their-marginal-tax-rates-rise-3
http://www.businessinsider.com/chart-of-the-day-the-fiscal-cliff-2012-11
http://www.businessinsider.com/is-the-decline-in-core-capital-expenditures-growth-a-worrisome-recession-indicator-2012-11
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