Mean While Back at the Ranch
Over the last two weeks we've looked at the European Debt Crisis and the potential impact on US exports if Europe falls into a recession (What’s All the Fuss?). We also covered the challenges many European countries face on budget agreements as a consequence of each country’s relatively unique social programs (The Cost of Leisure Part 2). It seems to me there is a lot of emotional noise; perhaps it’s time to step back and look at issues a little closer to home.
The official start of the 2012 presidential election campaign season is just 30 days away with the Iowa caucus on January 3, 2012. That means the political class has just one more chance to get something done and as a result, it appears we’ll have an extension of the employee payroll tax cut and unemployment benefits. These extensions will likely be funded with “kick the can down the road” funding mechanisms which will lead to cutting expenses sometime in the future.
Economic data was pretty mixed last week. Probably the biggest headline surprise was the drop in the unemployment rate to 8.6% down from 9.0%. Unfortunately, it was largely due to the decline in the Labor Force Participation Rate which fell well below the 66% to 67% rate that has been the norm over the last 20 years. On the positive side, October and September hiring numbers were revised up to 100,000 from 80,000 and 210,000 from 158,000 respectively.
Overall, our economy is still at a very fragile point and we’ve pointed out how a simple quarter of a percentage point can be the difference between expansion and contraction for our economy today. The Economic Cycle Research Institute (ECRI) still expects the US economy to tip into a new recession in 2012 despite what our policy makers do (you can read a summary and the full report here). The bottom line is, ECRI is basically saying, “If you think this is a bad economy, you haven’t seen anything yet.”
Companies continue to beat earnings expectations at pre-recessionary rates however we saw a big drop in the revenue beat rate. At the end of the US corporate earnings are near record highs thanks to improving margins.
Abroad, European Union Leaders meet for their next big summit in Brussels this Friday. We expect the leaders to continue to agree on being more connected through budget agreements and determined to save the EU and the Euro. However, anything can happen and the markets are growing impatient. On the other side of the Americas, we saw China unexpectedly cut required reserves by 50 bps.
Looking across the board, I think in the near term the upsurge and downsides are a toss-up and we need to continue to dig deeper to find the right allocation path. Remember without the uncertainty, the opportunities to generate returns would prove to be difficult and underline how critical it is to shape the risk by using time well.
Tim Phillips, CEO – Phillips & Company