February 2013 Economic Outlook
This is a monthly newsletter by Greg Sweeney, CFA, Chief Investment Officer, at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 27-year veteran of the Investment Management team.
Federal Reserve Monetary Policy
- At the next Federal Reserve meeting on March 13, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed continues to indicate rates would remain near these lows until 2015.
- The year-over-year consumer price index (CPI) released in December shows inflation at 1.7%. We expect the reported number to remain in this range on the next release.
- There is talk in Washington, D.C., of eliminating the debt ceiling. Our country’s current debt now totals $16.4 trillion and will be $17.4 trillion or more by the end of this year. The number is beyond most people’s comprehension, and certainly beyond politicians’ comprehension as well.
- What about raising taxes on the top 1 or 2% of taxpayers? Wouldn’t that eliminate the deficit problem? Our research for the 2013 Economic Outlook events showed that doubling personal income taxes on EVERYONE would not cover the annual deficit spending over the last four years. Politicians are deceiving themselves and voters.
- Voters give the government the right to manage its affairs in a judicious and forthright manner. We trust the government not to abuse this right. That trust appears to be breaking down, and if it continues to fade, there will be a whole new set of problems.
- To get an idea of what those problems might be, take some time to do an Internet search for the “Fatal Sequence.” Many different people over hundreds of years are credited with various parts of this research. Following is a summary of what you will find:
- Great nations rise and fall. They only exist until voters discover they can vote themselves generous benefits from the public treasury. From that moment on, the majority always vote for candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The people go from bondage to spiritual faith, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.
- The frightening part of this outline is that most of us can put dates around the progressive steps the U.S. has already moved past.
- Bond yields continue to push higher, with the 10-year Treasury consistently hovering around 2% at the present time. Long-term bond funds lose more value when interest rates rise compared to shorter term bond funds.
- Even at 2%, the yield still struggles to keep up with inflation.
- With interest rates this low, it will not take much of an increase in overall interest levels to erode the little coupon income that does come from bonds.
- The stock market appears to have found a footing, with returns year to date already about 60 to 70% of what we expected for the full year.
- Soon there will be new discussions about sequestration, which is the spending side of the “fiscal cliff.”
- Slowing GDP in Europe is also starting to raise questions about economies that are buyers of exported goods and services from the U.S.
- Investors would still like to have more clarity about the economy and the stock market. So far, the stock market appears to be the beneficiary of the certainty that does exist.
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