Tuesday, December 18, 2012

No matter what deal is finally agreed to by the politicians in Washington it will act as a brake on the economy. Reduced Government spending and higher tax rates for the wealthy will lower the national growth rate. This is not complicated, it is simple economics. One would hope the negotiators would be sensible enough to pick a target growth rate and try to craft an agreement that will start to solve some of our long term issues without suppressing the economy too much. The effects of misplaced aggressive austerity measures can be seen in Europe where there is bubbling civil unrest because the economies are contracting. The contracting economy decreases the opportunities for the unemployed and the young people entering the work force while reducing government tax revenues. The solution to massive budget deficits and runaway government spending will take a long time, it cannot be corrected in a year.

For all you fans of financial scams, next year should be a banner year. Pay particular attention to "crowd funding" and "non-publicly traded REITs". I believe both of these are "unborn sorrows ripe in fortune's womb" to quote the Bard. When these scams finally land we should think about going after regulators who should be on the case but once again are MIA. One of the regulatory bright spots in 2012 is the retirement of Mary Shapiro. Mary, who held significant positions at FINRA before moving to the SEC, proved just as ineffective at both agencies. I can't think of any financial scandal that occurred during her tenures that she had any clue was coming. If any reader knows of any, please let me know.

Monday, December 3, 2012

As the year draws to a close I have some random thoughts about the economy;

I believe we are going to go off the "fiscal cliff". This is a bet on the inability of Congress to agree on what day of the week it is rather than any analysis of our economic situation.

I think it is time for the leadership of the House of Representatives to lay out their fiscal plan in mind numbing detail. This would start a much needed debate about the direction of the country.

I think the economy is doing better and the real estate market is showing signs of life. The American voter will always vote the economy so the takeaway from the election is that most people think the economy is doing well and are optimistic about the future.

I don't think going off the "fiscal cliff" will be that devastating. It will certainly be deflationary and push the economy towards a recession but since I believe the economy is stronger that the talking heads on TV are saying I think the country will skirt a recession and stay in positive territory. It will be close.

I think that nothing has been done about the Greek crisis other than that some near term liquidity has been provided. Two years ago I was quoting a senior government trader as saying it is a "liquidity solution to a solvency problem" and that is still the case.

I believe next year will see Italy join the ranks of bailed out Euro members.

I think 2013 will be a pivotal year for the municipal bond market as financial stress on cities, states and local entities will change the way the market looks at credit quality. I expect more Chapter 9 filings, more privatization and more conflict with public employee unions. How it shakes out is anyone's guess, stayed tuned.