As the equity markets continue to hover in the stratosphere, we think it’s important to highlight some key facts and figures that we are not sure you will hear them anywhere else. Consumer confidence fell in January to a 14-month low and is probably a partial reflection of the payroll tax hikes that hit during the month, which will be difficult for stretched consumers to overcome. This tax increase amounts to about $2,000 annually for many and obviously even more for those in higher brackets. Prices at the gas pump have begun to get more painful again and are the highest for this time of year ever.
Obamacare taxes will be hitting too and marginal tax rates were just raised for many so that the spending circus in DC can continue. Unemployment just ticked up to 7.9% and we know that many small businesses will be looking to shrink below the 50-employee level to avoid entanglement in the morass we call healthcare reform. In general, transferring wealth from the private to public sector will continue until “we the people” say stop.
Many localities again lowered tax assessed values for residential real estate in 2012 in spite of the Wall Street proclamations that housing is strong. We do not argue the fact that major homebuilders have seen a big pickup in activity, but this bounce off of the bottom for them does not alleviate the pressure of so many underwater mortgages. Also, the mortgage underwriting is much more stringent today than it was a few years ago in the sense that there actually is one now, so gains in the sector will be slowed by that process.
Europe, particularly Spain and Italy at the moment, continues to represent an enormous risk due to credit issues in spite of the declarations that all is well overseas. Spanish unemployment has recently hit 26% and housing remains in a depressed state as their GDP contracts and bank loan losses mount. German retail sales fell 1.7% in December versus November in another sign the economy there is struggling. Most of the continent is in recession. EU unemployment rose to 11.7% in December. Bear in mind that the only reason bonds of the most troubled nations have rallied in the last six months is that the ECB has provided a backstop, but there has been no fundamental reform or credit improvement, just an enormous buildup of risk on central bank balance sheets.
To counter the global malaise, Japan has fired another round in the currency war as its government debt overwhelms its economy. We fear that recent Japanese efforts to devalue through QE may have taken the “beggar-thy-neighbor” mentality to a more dangerous threshold as many nations race to cheapen their currencies versus that of trading partners in order to attempt to meet future obligations with debased monetary units and boost exports. Japan has no choice because its debt-to-GDP stands at a frightening number of over 200%! The aging of its population has caused it to cross the Rubicon…not enough workers paying taxes to cover all of the government’s obligations. Our Congress and the Fed should pay close attention. After the Nikkei 225 equity index hit 39,000 in 1989 during an asset bubble it now stands near 11,000, despite numerous QE efforts and too much government spending for twenty years.
Whether one thinks the global economy is ready to boom or crater, so much good news is reflected in equity valuations that there is no room for error. It is difficult to find voices recommending caution towards markets even as indices flirt with new highs. We find this “throwing in the towel” to be irrational based on historical metrics, but we have witnessed similar lemming episodes in prior cycles. We know we can’t remember a time when it was so difficult to find cheap stocks to purchase. Even during the crazy days of the tech bubble in the late 1990’s it was possible to find quite inexpensively valued equities in the small cap and mid-cap sector.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.