This is a guest post by Philip Holton.
The financial press are heralding the US’s so called budget deal as the driver of today’s global equity market rally. They are right, it is, but does it mean we are safe?
If you don’t know the details, here are the main bits and if you feeling like spending some time with your computer here is the American Taxpayer Relief Act which is just a rewrite of the interestingly named Job Protection and Recession Prevention Act.
Of course, no one should be expected to crawl through that mountain of treacherously dull jargon, but they are worth a little look – you will very quickly notice that it all seems to be about “extending relief on tax cuts”. Specifically:
- A cut of $9 billion in government spending (1.8% of the deficit reduction)
- ==> An increase of $478 billion in tax receipts (98.2% of the deficit reduction)
(Only politicians could call nearly half a trillion in tax rises a Taxpayer Relief Act. Ed)
As the FT wrote:
Republicans in the House were angry that the Senate deal forged between the White House and the chamber’s Republican leadership focused solely on taxes and wanted to amend the bill to include spending cuts.
The same FT article also quote David Rothkopf, who is the head of a publication house called Foreign Policy:
Before you start pouring the champagne to toast the deal, remember, the minute the House vote ends, the countdown to the next crisis begins.
They don’t quote it, but it’s worth pulling from his Twitter page:
Anybody who portrays the deal currently being considered as a victory for anyone has completely lost perspective.
Which is something which would have been worth saying to Barack Obama as he winked to the press before he jetted off to Hawaii.
Back to the FT, Paul Murhpy, of FT Alphaville writes:
What’s going on?
Well, to summarise, one optimistic (and possibly premature) reading of the tentative resolution of the fiscal cliff issue in the US is that it will bring to an end the era of risk-on, risk-off trading, where substantially all assets are correlated and move in conjunction with the latest political utterings from Washington or Frankfurt.
Key phrase here is “possibly premature”. Yes, very much so: the U.S. debt stands at a gargantuan $16.4 trillion.
Sustaining the economy by the aptly named “Recession Prevention Act” is another can kicking exercise. Through the Federal Reserve’s monetary inflation, the spending afforded by successive American governments has been far larger than it should have been. The difficult thing is, is that when you try to get people to pay for these things they don’t want to. As Jean-Claude Juncker, Luxembourg’s president, once said: “We all know what to do, but we don’t know how to get re-elected once we have done it”.
The stock markets will of course go back down when the euphoria wears off. And the dollar will continue, along with the other central banking power house nations’ currencies, its miserable decline to zero.
In the meantime, if we believe that fiat currencies are the cause of our problems, then we should question statements like this from SocGen’s Dirk Hoffman-Becking:
Lower political uncertainty should result in a gradual dis-appearance of the risk-on/risk-off trade over time which should materially boost trading volumes as investors look for true alpha from stock/asset selection rather than just trying to get the beta right.
What he is saying, is that he expects these mass movements in the stock markets to dissipate. It’s a noble, but wrong thought. As long as we continue to flood our markets with money, this kind of behaviour will be with us.
In a remarkably clear article, the New York Times questions exactly how big an impact the Fed does have on stock markets, ending by quoting one bemused asset manager fearing “the unintended consequences of the expansionary activities of the central banks”.