1. WEEK ENDED MAY 25 2012
Thoughts
from Joe
TFJ will be taking a break next week as I perform a personal human solar experiment in the land of
zacahuil, the home of the volcano rabbit, and the birthplace of Anthony Quinn.
Steppin’ Out
Falling Off the Fiscal Cliff
The “fiscal cliff” is a term being used to describe dramatic changes in the country’s fiscal policies
beginning January 1, 2013 – assuming no changes are enacted. The linked report from the CBO says it
all in its first sentence: “If the fiscal policies currently in place are continued in coming years, the
revenues collected by the federal government will fall far short of federal spending.”
Some lowlights:
• Tax policy changes:
o AMT changes will increase taxes by $221 billion
o Payroll taxes will reset upwards by 2 percent or $95 billion
o Various other provisions will expire increasing taxes by $65 billion
o Affordable Care Act taxes will begin at $18 billion
• Federal outlays will be reduced by:
o Automatic reductions in spending due to failure of the “Super Committee” last year will
reduce outlays by $65 billion in both discretionary and mandatory spending
o Expiration of extended unemployment benefits will lower spending by $26 billion
o Lower Medicare payment rates for physicians will save $11 billion
The CBO estimates that these scheduled changes in outlays and revenues will weaken the economy to
the degree that overall government fiscal health will deteriorate.
In the end, it’s likely a “kick the can” strategy will be executed in Washington. The only question is, will
it happen before or after the election?
Top Eight
1. Another European summit ends in disappointment. The Brussels summit ended early, urging
Greece to elect a “pro-austerity” government on June 17th. It’s possible the radical left will lose
– even after gaining the most votes in the prior election – but only if Greeks fear the left’s
destructive agenda enough to band together.
2. 2. Since 2009, government student loan debt outstanding has risen more than 4x. The increase
has more than offset deleveraging in the consumer sector for the nonrevolving category as
student loans have grown $350 billion while other debt has dropped just over $200 billion. The
unemployment rate for college educated residents is just 4 percent, however many of today’s
educational institutions are loading students up on debt and leaving them without the skills
necessary to enter the workforce. This will likely affect the above employment stat dramatically.
3. The ECB is reportedly lending Greece up to €100 billion in previously unreported emergency
aid. The linked article refers to the debt as “secret” however the loans were perfectly legal and,
in fact, the unreported nature is a necessary part of the emergency program. Of course, it’s only
secret if it stays out of the news.
4. Spanish Banks feel the heat as Bankia becomes the country’s largest bailed out bank in
history. News of the bailout arrived after S&P cut the ratings of five Spanish banks and revised
downward its assessment of economic risk in the country. SSDD.
5. Ford gets its logo back. The logo was pledged in a bailout loan prior to the liquidity crisis and
Moody’s upgrade of the company to investment grade (low BBB) releases the logo from
hock. The creativity of lenders never ceases to amaze me.
6. Zero interest on German debt? Now that’s “flight to quality!” The 2-year notes will be priced
at a slight discount, but demand for the issuance came from investors who are afraid of a future
flight to quality that will drive yields negative. One more brick in the firewall that is being built
around “healthy” Europe for the upcoming Grexit.
7. Money fund reform to affect some $2.6 trillion in cash assets. The linked article does a good
job of recapping where authorities stand on possible upcoming money fund reform. Regardless
of the authors’ contention, I would bet no reform will occur this year.
8. A growing percentage of CFOs world-wide are willing to pay bribes to win or retain
business. The linked E&Y survey has 15 percent of CFOs ready to pay up versus just 9
percent last year. Also, 4 percent of CFOs said they were willing to misstate financial
performance. Just keep in mind, this is a global survey, but it still highlights the “agency
problem” in the corporate world is alive and well.
Key Indices
Return
5/25/2012 1 week YTD Treasury 5/25/2012 5/18/2012 Change
Dow 12,455 0.7% 1.9% 30yr 2.80% 2.80% 0.00%
S&P 500 1,318 1.7% 4.8% 10yr 1.71% 1.71% 0.00%
Nasdaq 2,838 2.1% 8.9% 5yr 0.74% 0.74% 0.00%
Euro Stoxx 2,162 0.8% -6.7% 2yr 0.29% 0.29% 0.00%
Nikkei 8,580 -0.4% 1.5% 1yr 0.19% 0.19% 0.00%
Hang Seng 18,713 -1.3% 1.5% 3mo 0.14% 0.14% 0.00%
