Cause for Optimism
In Washington and on Main Street debate rages over
the issue of how to deal with long-term deficits and
debt and whether to pay for them by raising taxes or
cutting spending. This is bound to be one of the great
discussions of the 21st century. How it is resolved, for
better or worse, will affect America’s place in the
world order as well as the degree of prosperity at home.
This is not a debate that is going to be settled
overnight. We believe it will be an evolutionary process
stretching over many years, not a determining factor for
2013. The debate has begun and that is a good thing but
don’t expect the issue to be solved in the short term.
Meanwhile, citizens are angry about the bitter
partisanship, acrimony and nastiness that have
characterized policy debates in Washington. The approval
rate of Congress hovers in the low double digits. From
time to time, volatility shakes the stock market.
Individual investors have been withdrawing funds from
the stock market for years though there is some
indication that this may change in 2013.
Nonetheless, we feel there is cause for optimism in
the coming year despite the shenanigans of elected
We have written before about the revolution in
domestic energy production. It is powerful. The recently
acquired ability to access natural gas from shale
deposits is transformational. The newfound abundance of
natural gas is driving a renaissance in industrial
production as the cost of this key input to the
manufacturing process has declined sharply. As a result,
oil, chemical and steel companies among others are
beginning to invest in new plant and equipment and are
increasing employment. The United States is suddenly the
world’s low cost producer in a number of industries.
The domestic automobile industry is reviving
strongly. Fourteen million light vehicles were sold in
2012 and over 15 million are expected in 2013 up from 11
million only a few years before. The industry is
expanding domestic employment and investing in new
plants, models and technology.
The housing market appears to have hit bottom. Prices
and the number of units sold are rising. Mortgage rates
remain historically low, encouraging buyers. Builders of
new homes are expanding production. Should prospective
buyers become convinced that the worst has passed; there
could be a surge in activity. Fear of missing the bottom
motivates buyers. The housing industry has gone from
being a headwind to being a tailwind for the economy. It
will add to GDP this year for the first time in a long
As we look into 2013, there are certain trends that
we think will continue.
The Federal Reserve will continue to promote low
interest rates by buying in the market $1 trillion worth
of government and mortgage securities. Low interest
rates help the banks rebuild their balance sheets and
support the housing and auto industries. By buying bonds
in the open market, the Fed injects liquidity into the
economy and helps the Federal Government sell its debt
at low cost. It is interesting to note that the Fed
actually buys over 90% of the new debt issued by the US
government to fund its annual deficit. Without Fed
buying, interest rates would be noticeably higher and
deficits more costly to finance.
American politics will continue to be tempestuous in
2013. An unsatisfactory mini-deal was reached at the
start of the year to avoid the “fiscal cliff” but
confrontations will continue. In February, the limit of
how much debt the federal government can issue needs to
be raised in order for the government to continue to pay
its bills. Republicans controlling the House of
Representatives want the President and the Senate to
accept spending cuts to address the country’s long-term,
unsustainable accumulation of debt. It may well be a
nasty fight and could shut down the government for a
while. Markets will probably surge or sell off on each
sound bite from this or that politician. But a deal will
be made, however inadequate. As mentioned above, we
believe the debt issue will be solved in an evolutionary
process over time.
Internationally, the euro crisis runs on but markets
are beginning to settle down. Interest rates charged by
the market have come down in the weakest nations,
Greece, Spain, Portugal and Ireland. This is a good
thing. The Euro has been surprisingly strong. Euro
members have begun to take measures to restore
competitiveness. Recovery continues slowly. Confidence
In Asia, China is always the big story. Fears of a
hard landing for the economy seem to be misplaced.
Economic statistics point to a reacceleration of growth.
While concerns continue about the country’s financial
institutions, we expect calm sailing for this year.
Stock markets around the globe had a pretty good year
in 2012. Strong corporate profitability and ultra low
interest rates have helped prices rise. Increasingly,
investors are desensitized to the political drama in the
seats of government. There is a sense of being able to
Stocks continue to be the best of bad bunch when it
comes to asset classes. While interest rates are
unlikely to go yet lower, corporate earnings in the US
are expected to rise 5% in this year. This could be the
year that asset allocation accelerates into stocks and
out of fixed income. As long as the problems facing the
world remain on a slow simmer, stocks could have a way
There is cause for optimism.
We wish all our clients and friends a Healthy, Happy
and Prosperous New Year.
Please read our important notice
about these letters and the securities they mention.