Transcript November 2012 - Economic Update Post Election

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
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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