David Evanson and Oliver Pursche
Minyanville.com, Summer, 2012
The global economy is weak and may be weakening further. Two weeks after a much heralded agreement to help bail out Spanish banks, the excitement of the prospect of Europe finally solving its debt crisis is rapidly fading.
While the ECB, People’s Bank of China, and other central banks have taken further measures to ease monetary policy, these moves have not sparked any sort of rally in equity or commodity markets. Investors are beginning to view asset purchase programs and low interest rates as signs of weakness; they do not view these with the optimism and furor they had in 2009 and 2010.
Simply put, when the tank is empty, it doesn’t matter how hard you press on the gas pedal. It’s time to reload.
Given the low growth prospects for the economy, tepid earnings expectations, and already high productivity levels, the question is: How do we reload? The answer, as odd as it sounds, is Washington, DC.
The contentious nature of politics with its deep partisan divides has led to a near stand-still on Capitol Hill. As a matter of fact, I have not met a soul who believes that our nation’s politicians will get any meaningful legislation passed before the November elections. However, history tells us that a lame-duck Congress actually gets a lot done — and within that history lies our hope to reload.
The current discourse and pessimism is in good part caused by the regulatory and tax uncertainty that lies ahead of us. Will dividend and capital gains taxes rise to income tax levels? What about the other tax cuts? Will they simply expire?
The “fiscal cliff” is looming — and with it, a 4% reduction in GDP. As Winston Churchill once said, “You can always count on the Americans to do the right thing, once they’ve exhausted all other options.” Well, we are almost done exhausting all of the other options.
I believe that our politicians will take action to avert disaster by extending some tax cuts, reducing some spending, and making some general compromises. I doubt very much that the moves will be significant enough to celebrate the end of partisanship, or enough to radically address our fiscal shortcomings, but they should be able to avoid disaster and therefore be a catalyst for a market rally.
Investors need to recognize that markets are a forward-looking mechanism. As conventional wisdom turns and begins to take the same view, markets could rally quickly. I expect this to happen as early as August 2012.
With Europe making moderate improvements, corporate earnings expected to rise 12% in 2013, and all of the combined central bank actions, it is our politicians’ rhetoric that is inhibiting progress.