Cliff Diving and Wind Surfing

After another seven months on hiatus, I am attempting again to get back to a more regular writing schedule.  I had intended to start writing again after my exam in June (I did pass, thank you for silently asking), however, as is often the case, life got in the way.

And, a lot has happened in that time (more on that later), but now I want to get into discussing what is going on in the world as it pertains to the economy and the markets.  This will be a short (hopefully) account, focusing on translating the headlines and soundbites you may be hearing on the news, followed up by some personal developments just to get everyone up to speed.

Cliff Diving
The last few months of business news this year has been all about cliffs.  The most popular one being the Fiscal Cliff.  For those of you who may not know what this is, its a series of tax increases and government spending cuts scheduled to take place on the first of the year unless the President and Congress can agree to pass legislation which says otherwise.

What makes this a potentially dangerous scenario is the immediate negative impact this would have on our very fragile, and modest economic recovery.  For instance, the average U.S. household could see a tax increase of over $2,000.  “But they could pass a bill in January or February that will have a retroactive effect of lowering taxes”, you say; “so that taxpayers may never actually have to pay up on those higher rates”.  While this is mostly true, one aspect of this equation is the payroll tax, which comes directly out of every one of your paychecks.  Therefore, people will see a material impact right away and this could effect their spending habits.

The spending aspect of this cliff (known as the sequestration) could also have numerous negative effects.  The cutting of farm subsidies could double the price of milk at the grocery store, defense spending getting slashed could force contractors (companies like Boeing, Lockheed Martin, and Honeywell) to lay off workers, and worst of all, unemployment benefits could be shut off suddenly for thousands of people who are still out of work.  Many people have said that these negative effects are overstated and could be resolved even if no deal is made by simply enacting patches on a case by case basis.  Either way, I would still say that the outcome will not be a positive one for our economy.

As much press as this fiscal cliff is getting we’ve had a couple other cliffs in the news lately.  Unfortunately, I regret to report that we fell right off the Twinkie Cliff and crashed at the bottom.  Here, the Hostess Bakers Union could not come to terms with the owners of the company and they had to close up the whole operation as a result.  Brands like Twinkie, Ho-ho, and Wonder Bread are no longer in operation and although it is speculated that a competitor, or a private equity company will come and purchase some of these bigger name brands many people have lost their jobs which won’t be coming back.

The final cliff, and the steepest one in my opinion, was the Cargo Cliff.  This was fortunately averted just before the weekend as an eleventh hour deal was made.  If the two sides in this debate did not come to terms all the dockworkers at ports from Houston to Boston would have gone on strike, and we could have seen a massive kink in the global supply chain, as all container cargo on the East coast stood still.  A similar strike in 1977 was estimated to have cost the economy close to $1 billion per day.  I am just glad we won’t have to figure out what that would cost us today.

Wind Surfing
Despite markets being jittery from having to navigate all these cliffs, there are some very positive tailwinds that the economy has going for it.  The strongest of these is the housing market.  After all it was a housing bubble that sparked the financial crisis of 2008 and prices continued to move down even after we were supposed to be in recovery mode.  So why the optimism now?  Well prices for houses are finally starting to move higher.  There are more and more houses under construction, and we will need a lot more houses just to catch up with population and household formation growth.  Furthermore, due to the lack of construction for the last five years, we have also seen rents start going much higher, while housing affordability (measured by housing prices and cost of financing versus average family incomes) remains historically very low.  As home builders put more supply on the market they will finally have to start hiring more workers (backed up by the fact that average hours worked in the construction industry have gone higher the last couple of months.  There is only so much overtime workers can put in before you need more hands on deck).  This will have the secondary effect of having all these proud new homeowners have to go out and buy things to furnish their new pads.

Other much smaller tailwinds exist in the economy as well, and can be seen just in the fact that things continue to improve.  Jobs and consumer confidence continue to go up.  Retail companies, while reporting a less than stellar holiday season, have continued to show solid profits, which appears to be a result of less aggressive pricing.  This shows that they aren’t desperate to get people in the door but instead want to hold onto their margins.

The Bottom Line
The consensus right now is that if the government could get their act together and hammer out a deal to avoid the sharp sudden impact of the fiscal cliff, the markets could potentially move much higher.  Our overall economic backdrop is positive and improving and companies want to hire new workers and buy new equipment but many have been on pause to find out what happens in Washington.  It is hard for a business to invest for the future if they don’t know what the rules of the road are going to be for things like taxes and regulation.

As I write now, tomorrow is New Years Eve and I have still not heard anything coming out of Washington suggesting a deal is getting done.  Things could get dicey for the first few weeks of January and maybe the first part of the year, however, strong tailwinds could help the economy glide even after going over a cliff or two.  I would look past the cliffs and suggest that the U.S. economy will be in better shape next year than we are now, but then again I am ever the optimist.

On a Personal Note
As I mentioned things have been a little hectic since my last post.  My intention to keep up with writing always seems to get sidetracked by one thing or the other and lately there has been a lot to work on.  After the exam, I took a little extra time to get caught up on some reading that I had been neglecting during my study time.  (If anyone is interested in the economic history of the United States, I can recommend John Steele Gordon’s Empire of Wealth which is a fascinating account about how our economic progress shaped the country.)  The kids started getting to more and more activities now, so I spent some weekends going to things like cross country meets (I did not know they had cross-country for 6 year olds, but my daughter loves it), and I also moved to a new employer where now my office is located much closer to home.  My commute was reduced by 95%, which has given me a little extra time to get some much needed projects done around the house.  Time well spent certainly, but busy none the less.

Alas, with New Years just a day away, I will again make my one annual resolution, which is to do a better job at time management.  The thing is that there are a bunch of important things that I want to get done for 2013, like kicking butt in my new job, writing regularly, reading more, etc…. but they will need to get done without taking away from the even more important things (like yelling myself hoarse at cross country meets).  And the trick is that it can all get done, as long as I use my time well.  I’m definitely not great at it, but a willing effort will get you halfway there; and, I get better every year.

– “Time is what we want most, but what we use worst” – William Penn

On that note, I wish all of you a joyous and prosperous 2013.  Thanks for reading and please feel free to share your thoughts.


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