November 2012 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 26-year veteran of the Investment Management team.

 

Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on December 12, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed updated its target, indicating rates would remain near these lows until 2015.

Inflation

  • The year-over-year consumer price index (CPI) released in October shows inflation at 2.0%. We expect this number to drift higher again this month. Core consumer expenditures on healthcare, food, energy and housing are well above these reported inflation numbers.

Economic Activity

  • The “fiscal cliff” is a daily news topic … as though someone just discovered it was a problem. Readers of this publication know it has been a problem for a long time as we have reported for the last few years on federal debt levels rocketing toward gross domestic product, and now exceeding it by $486 billion or 3%. Look for politicians to mount an all-out assault on the problem and implement bold solutions such as again raising the federal debt ceiling and kicking the can down the road. No sense addressing the wild spending that led to $1.3-trillion-dollar annual deficits and added $6 trillion in federal debt over the last four years! Greece’s debt problems will be little more than a grease spot compared to the debt debacle well underway in the United States. Go, Team USA!
  • It is frustrating to know a bit about economics and watch this all unfold the way it has. At some point, we all need to realize that politicians are bribing us with our own money. The one thing Washington can agree on is that the public cannot be shown directly the costs of government.
  • European debt issues are not getting any better, either. Riots remain a problem in Greece, and it would not be a surprise if that country eventually needed to leave the Euro currency. Then the question will turn to the prospect of other countries doing the same thing – although that is still a ways off.
  • Soon, we will hear news of traders being arrested for manipulating LIBOR (London Inter Bank Offer Rate), which is used as a benchmark for setting short-term interest rates. These folks were doing the same thing central banks around world are doing: manipulating interest rates lower. Why the double standard? Should central bankers be arrested, too?
  • The art of a magician lies in deception and sleight of hand. The fiscal and monetary stimulus both here and worldwide make for a giant economic magic show. In the end, we will find out what was real and what was an illusion.

Fixed Income

  • New fears of slower worldwide growth, rising government debt, high levels of unemployment and varying degrees of social unrest have supported renewed interest in U.S. government bonds, pushing yields on 10-year Treasuries down to 1.6%. Returns after inflation remain negative and continue to be a drain on savers’ standards of living. Corporate and high-yield bond yields are also at record lows.

Stock Market

  • As the year draws to an end, the market is wrestling with a few themes: the growing prospect of increased dividend tax rates, rising capital gains tax rates and the potential downward pressure of sequestration on corporate revenues and earnings. Right now, it looks like the magic of the most recent QE III program may already be wearing thin. Good thing it is unlimited.

View previous Economic Outlook newsletters.

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