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Wednesday, February 13, 2013

Some perspective around the “fiscal cliff”

Dad and I often laugh about some of the “extreme” terms that are coined by the media. One of our favourites is “fiscal cliff”, I mean blimey, how scary does that sound?! For me that term conjures up an image of Barrack Obama hanging one-handed from the edge of a cliff with Republican Treasurer, Tony Parker, prying at his fingers.

Don’t get me wrong, the situation in the US is serious, but as always, we need to keep perspective.

With all the doom and gloom, there’s also been a lot of good news coming out of the States and so I feel a little bit of balance is called for… Below are some good news stories that you could have been excused for missing amongst all the negative noise.

  • Whilst there’s been a lot of media coverage on the fact that that the US economy contracted slightly in the December quarter, it would seem this is mostly related to disruptions caused by Hurricane Sandy and a drop in defence spending. So far nothing concrete to indicate they’re heading back into recession. 
  • The pace of growth in private final demand actually picked up from 2% in the September quarter to 3% in the December quarter, and basically what this means is that underlying growth is fine, which is a positive sign.
  • US corporates are in a financially very strong position with approximately $1.7 trillion dollars in cash sitting offshore. More than 70% of listed US companies reported greater than forecasted earnings expectations last quarter and 65% reported greater than forecasted revenue expectations.
  • Business investment is looking stronger, construction spending is on the rise, consumer sentiment is up and jobs growth has been fair.
  • The Republican Party (who control the House of Representatives) have agreed to cooperate with Obama’s recent debt ceiling proposal, albeit with conditions, which is a positive step. As I mentioned on my radio program last year, I couldn’t ever imagine the Republican Party would want to be seen as the reason the US went back into recession and for this reason would ultimately always agree to raising the debt ceiling. However, last year that they left their cooperation until the 11th hour and the argey bargey caused some real confidence damage. And if I can just hark back to last week’s blog post, you’ll recall the impact investor confidence has on sharemarket performance in the current climate.
  • Obama has proposed a “sequester” on automatic budget cuts and tax increases which would have otherwise come into play this year, and this should hopefully have a positive effect on confidence and economic recovery.
  • The International Monetarty Fund (IMF) have conceded that some of their fiscal austerity measures have been harsher than necessary, and will take a more moderate approach going forward.
  • The US banking system may not be completely “fixed” but is greatly improved, and definitely well ahead of Europe.
  • The US has access now to abundant cheap energy in the form of gas, and by 2017 is set to overtake Saudi Arabia and Russia to become the largest single producer of oil in the world.
  • The US housing crisis appeared to bottom late last year, and US households are reducing debt at around US $500bn per annum.

Without question, the US still have a massive task ahead to fully recover from the financial mess they got themselves into - a task made even more difficult by the political instability of a Government with no clear majority.

It’s easy to get caught up in the negativity because frankly that’s what’s thrust upon us every day, but at the end of the day, the question we really want answered is – how does this effect us? And you can only get this answer and perspective with a balanced view of what’s going on. Hopefully I’ve helped provide a little bit of that today.

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