Reuters blog archive
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The new-year euphoria in financial markets looks overdone. The S&P 500 is up 5 percent, investors are throwing record sums into equities and Treasuries are flirting with 2 percent yields. But fiscal cliff diving can still hurt the economy and at least one incentive to put money to work may wear off.
There are reasons for optimism. Two-thirds of the S&P 500 companies that have reported quarterly earnings have beaten profit estimates, according to Thomson Reuters I/B/E/S. That, and Congress’s decision to make many Bush-era tax cuts permanent, has helped embolden retail investors, who poured a record $55 billion into equity mutual and exchanged-traded funds this month.
The last time such inflows reached an all-time high, though, was in February 2000 after the economy had grown at a 7 percent clip. That’s hardly the case today. BNP Paribas reckons the economy grew just 1.3 percent in the fourth quarter and will expand a mere 1.0 percent in the first three months of this year.
It doesn’t sound sustainable but, at least in coming months, businesses look set to keep booming even as consumers come under pressure - in line with the recent trend. That’s because the economic hit from the partial deal on the fiscal cliff will hurt salaried workers disproportionately, says Steven Ricchiuto, chief economist at Mizuho.
Although the worst of the fiscal cliff has been avoided, the compromise is not macroeconomic neutral. Our calculations, in fact, suggest that the drag created by the reversal of the payroll tax cut and the various tax hikes on upper income households will cut real GDP by upwards of 0.5% to 1% from our preliminary 1.5% to 2% forecast.
from Anatole Kaletsky:
Will the world economy be in better shape in 2013 than 2012? The Economist asked me to debate this question with Mohamed El-Erian, chief executive officer of PIMCO, the world’s biggest bond fund. El-Erian is the author of When Markets Collide, a brilliant book that coined the term “New Normal” to describe the world’s inevitable descent into a Japanese-style era of stagnation after the 2008 financial crisis. I was delighted by the invitation because I wrote a book at about the same time, taking a very different view of the crisis – and many of my predictions finally look like they will be realized in 2013.
In Capitalism 4.0, I argued that the crisis would create a new model of global capitalism, one based neither on the blind faith in market forces that followed the Great Inflation of the 1970s nor on the excessive government intervention inspired by the Great Depression of the 1930s. While this new species of capitalism would doubtless go through a painful period of evolution, its character would be fundamentally optimistic because it would be driven by four historic transformations. Those transformations helped trigger the 2008 crisis, but their roots are in the demolition of the Berlin Wall in 1989.
from The Great Debate:
The hypocrisy over deficits and calls for shared sacrifice can be illustrated with one simple statistic. According to the Institute for Policy Studies, 25 of the most-well-paid chief executives got higher compensation than their companies paid in federal taxes. There’s a class war on, as Warren Buffett has noted, and his class is winning it.
The drive for austerity, with its attendant manufactured crises, carries with it a host of mini-outrages making this point. Americans learned after the fiscal cliff negotiations ended that the final agreement, ostensibly to pass “tax hikes for the wealthy,” extended huge corporate handouts. These included special breaks for NASCAR, help for Hollywood movie studios, $3 billion a year for General Electric, support for mining and railroad companies, and even a push for electric scooters.
from Stories I’d like to see:
1) Fiscal cliff Medicare meddling:
According to this report in the New York Times, last-minute negotiations on the fiscal cliff included new congressionally imposed limits on what Medicare will pay for “nonemergency ambulance transportation of kidney dialysis patients” and “would reduce Medicare payments … for stereotactic radiosurgery, complete course of treatment of cranial lesion(s) consisting of one session that is multi-source Cobalt-60 based.’”
Yes, Congress really does get that far down in the weeds when it comes to dictating how Medicare doles out more than $500 billion a year. This includes, for example, overseeing the payments Medicare allows, by state, for designated categories of ambulance rides (“critical,” “emergency,” “air evacuation,” etc.).
U.S. government bonds sold off last week following December Fed meeting minutes indicating growing doubts inside the central bank about the effectiveness of quantitative easing. Yields on benchmark 10-year notes hit an eight month high of 1.975 percent on Friday, in part as investors priced out some of the Fed asset purchases traders had been counting towards the end of 2013.
Other forces were also at work. Markets were relieved that the ‘fiscal cliff’-related expiration of Bush-era tax cuts had been circumvented, and encouraged by some moderately better U.S.economic data. The S&P 500 closed the first week of the year at its highest in five years.
from The Great Debate:
“Tax relief is an achievement for families struggling to enter the middle class,” the president trumpeted, shortly after Congress, by sweeping bipartisan margins and after a bruising battle, had lowered taxes for almost all Americans. “For hard-working lower income families, we have cut the bottom rate of federal income tax from 15 percent to 10 percent. We doubled the per-child tax credit to $1,000 and made it refundable. Tax relief is compassionate, and it is now on the way.”
Despite a furious counterattack from the opposition, the president had scored a major victory by securing lower tax rates for everyone in the middle class on down.
from The Great Debate UK:
--Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.--
The deal to break the deadlock in the US looks awful, far worse than going over the cliff, which I suspect would have been a lot less damaging than is usually assumed.
from David Rohde:
Nancy Pelosi, of all people, got it right Thursday morning. In an interview broadcast on National Public Radio, the liberal House Minority Leader agreed that spending cuts and entitlement reforms are necessary.
“The size of our deficit is an immorality, we should not be heaping those responsibilities onto the future,” Pelosi said, sounding oddly Republican. “Finding reductions, subjecting every federal dollar spent to harsh scrutiny as to whether the taxpayer is getting full value for the dollar, is very important. And that holds true in defense as well as on the domestic side.”
from The Edgy Optimist:
So we did not fall off the cliff. But the reaction to the news of the deal suggests that we’ve become a culture addicted to crisis, because barely had the vote been taken when the spin from politicians, from the mainstream media, and from the cacophonous web was angry, sullen, and negative.
The problem is said to be, in no particular order: Washington, partisanship, Tea Party ideologues, tax-and-spend Democrats, unions, rich people, America, unemployment, underemployment, the shafting of the middle class, the end of the American dream, the untenable deficit, unfunded mandates, and unreasonable expectations. But maybe the problem is none of those; maybe it’s a deepening love affair with crisis. The perverse lure of descent and an inability to break out of the cycle is threatening to overcome us.