Mixed forecast

It is said that every cloud has a silver lining. You could certainly have fooled me, had you seen some of the weather which has beset this country over the past week or so. The US Labor Department report on payrolls and employment, delayed by the government shut-down until yesterday, on the other hand did.

Although more or less all components reported were disappointing, most of all the key non-farm payroll number which came in at +148k as opposed to the forecast of +180k, I am not too worried. Sure, growth in the US economy is slow and no doubt slower than optimists would have hoped for but I have never seen some sort of magical Star Trek style acceleration into hyperdrive which would bring sustainable growth of the type which would bring us back to pre-crisis levels of expansion and thus employment.

While, to coin a phrase, Q4 opened with the shut-down, the budgetary uncertainties had been known for a long time and I see no reason not to assume that hiring and investment decisions which might have been taken in the latter part of Q3 would had been put on hold.

These decisions might again find themselves suspended as businesses wait to see what the Capitol Hill Kindergarten comes up with between now and the dual deadlines in January and February. Alas, I remain firmly in the camp which believes that the fear of not getting re-elected in November will cool some of the hotter heads and that, irrespective of whether right or wrong, irrespective of ideological issues, a full-frontal, no holds barred conflict will be averted.

Markets were, however, well pleased with the outcome with the Dow initially rallying 150 points and 10yr treasuries leaping a full point to trade at around 2.50%, its lowest level since mid-July. A survey undertaken yesterday amongst the US primary dealers now shows that “tapering” is not expected to kick in until March next year at the earliest. No wonder then that stocks cried “Yippee, the economy’s going nowhere, let’s rally!”

California dreamin’

I had dinner on Monday night with a first cousin of mine. He is London born, left Blighty in 1971 for Australia but ended up in the US a few years later and now lives in Los Angeles where he makes a something of a living as a hypno-therapist after years as a film editor with CBS News. He rides a Harley Softail, drinks his vodka neat and is an all-American democrat, albeit with a distinctly English accent. His question to me was very simple: How do we ever get out of this mess? We chatted around the subject until we reached the point where we agreed that we couldn’t see the way out and that the best thing for someone over 60 to do was to pull one’s horns in and behave as though all would be well.

The subject of O’Bamacare came up and he asked my opinion why resistance was so fierce amongst the Reps against a basic healthcare safety net. I pointed to the National Health Service in the UK and to similar systems across Europe and added that it is easy to define the minimum standard of care but it is probably not possible to cap the upside and hence the costs. In a country where keeping taxes low and disposable income high is a holy cow, anything which might prove to be a financially bottomless pit, other than the military of course, is a no-go area and even the latter is facing some swingeing cuts now. As worried as my cousin might have looked, it’s amazing what the California sunshine, a big Harley and the open road can do to make it all a bit more bearable.

Meanwhile, Martin Wolf of the FT wrote a piece that appears this morning which argues that America is not in a debt crisis which it can’t manage, especially since its tax take as a percentage of GDP is so low. Wrong! If taxation is used to rebalance wealth, that is to tax the rich in order to make facilities available to those less fortunate who otherwise could not afford it, then yes. But if taxation draws disposable income out of the economy in order to reduce debt – that’s austerity to you and me – then the economy can’t and shouldn’t grow. The government needs to generate both cyclical and structural surpluses and these cannot be achieve by simply recycling value added generated within the economy. More to the point, if the economy does show strong growth, then interest rates will rise and the cost of debt service will chew up a significant proportion of increased fiscal inflows.

Alas, what does this do, if anything, to help us choose how to position between now and the end of the year? Copper is back above US$7,300, having traded s low as US$6,500 during the summer and aluminium is headed towards US$1,900. Metals generally look more positive than fiinancial assets – equities are trading rates, not earnings – and I would keep an eye on both copper and aluminium. If the latter breaks US$1,950/tonne and the former US$7,500/tonne, then I think the bullish message is clear and you divest from financial assets again. If they fail and trade back down again, stay long stocks and bonds. Now how about that?