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The Election, Fiscal Cliff, Sandy and Europe Daryl Montgomery November 15, 2012 Copyright 2012, All Rights Reserved The contents of this presentation are not intended as a recommendation to buy or sell any security. The Presidential Election Fiscal Cliff Hurricane Sandy Aftermath Visit Sunny Greece Presidential Election • • • • • • Obama margin 2.8% in 2012 vs. 7.2% in 2008 Romney won no swing states. Democrats gained 2 seats, control Senate. Republicans still have majority in the House. Basically, nothing changed. Expect same policies as last 4 years – large deficits, more regulation, higher taxes, easy monetary policy with money printing. • Recipe for economic malaise with inflation. Result of Presidential Election by State Red Republican, Blue Democratic Presidential Results by County Red Republican, Blue Democratic Fiscal Cliff – What’s the Excitement? • Simultaneous expiration of tax cuts, combined with implementation of spending cuts. • About $300 billion each or $600 billion of fiscal drag (lack of stimulus). • Hysteria is an admission that U.S. economy requires massive deficits to function (will only cause smaller large deficit). • Threatened downgrade by credit agencies (why don’t they downgrade for money printing?). The Fiscal Cliff U.S. Fiscal State • Debt Ceiling at $16.4 trillion. • National Debt: $16.26 trillion National Debt Subject to Limit: $16.06 trillion State and Local Debt $2.8 trillion Unfunded liabilities $121 trillion. • Debt to GDP ratio >105% (actually much greater). • Debt doesn’t include Federal Reserve or Fannie Mae, Freddie Mac and FHA obligations. • Federal budget deficit for 2012 was $1.1 trillion. • 2012 Trade Deficit could reach $600 billion. U.S. National Debt since 1945 Hurricane Sandy • Should negatively impact GDP in Q4 2012, although may show up in Q1 2013. • Holiday retail sales should be light in Northeast • Estimates of $20 billion in damage are way too low (Katrina was $100 billion). • Will increase federal and state deficits (state taxes). • Gas shortage indicates price control. Black market formed as happens under price controls. Europe Slips Further • Greece: - Greece approves €13.5 billion austerity measures. - Greece funding itself with T-bill sales. -Now has to 2022 to meet 120% debt/GDP target. - This means Greece will need a 3rd bailout (after that it will need a 4th, 5th and 6th bailout). - IMF and EU fighting over this. • Major protests in Greece, Italy and Portugal. • Youth unemployment Greece: 58%, Spain: 54%, Italy: 35%. • Spain freezes home evictions for 2 years. Economy • U.S GDP supposedly grew by 2.0% in Q3 • UK supposedly out of recession (growth flat without Olympics) . • France could be entering a recession. • EU GDP growth projected to be barely above zero in 2013. • Japan Q3 GDP declined 0.9%. Recessionary. • China’s economic numbers have improved. Monetary Policy Worldwide • Central Bank Interest Rates: - U.S. and Japan close to 0.0% - UK at 0.50% - ECB at 0.75% • Fed done with Operation Twist in December. • Fed Balance Sheet has NOT expanded!!! • BOE: QE2 program finished! • ECB balance sheet flat. • U.S. Monetary Base pauses, money supply rising. Fed Balance Sheet US, UK, ECB, BOJ Balance Sheets Fed & ECB Balance Sheets vs S&P 500 Dollar Swap Lines Demand coming from EU and Japan. U.S. Monetary Base (Indication of Future Inflation) MZM Money Supply