The last minute mini-agreement limiting some tax increases has goosed risk markets today with a celebratory surge. The fun is likely to be fleeting. The fact is that while higher revenue was needed, even the smaller tax hikes are forecast to be a 1 to 1.5% drag on US GDP in 2013. From a barely beating maybe 2% growth in 2012, a loss of this magnitude will be felt and likely to translate into further job losses and consumption weakness this year. And that is before any further negative impact from the next phase of debt-ceiling theatre set to undermine public confidence over the next couple of months. And before any government spending cuts have been introduced at all. Surely some cuts (even if miniscule in the bigger picture) will come into play over the next few months? Or have the Republicans given up all their big talk for no walk whatsoever?
If there are no cuts then the US will continue spending at least 1 trillion more than they take in each year and will surely deserve another debt downgrade which should prompt higher borrowing costs that would in turn further extract cash flow that has been promised in support of the real economy. A perfectly negative fiscal loop seems to flow either way here.
At the end of 2012, US stocks were the third most expensive market on the planet with the S&P 500 trading above 21 times the cyclically adjusted Shiller PE. See comparative chart here. Further algo price ramps only make equities even less attractive to investors.
For those who prefer facts over false hopes, some end-of-year review charts offer some big picture reminders of where the US economy is actually beginning the new year. See NY Times: America in 2012: as told in charts
Also see: Five years later some countries still lag for more reality on the global”recovery” since 2007. Accept it or not, our generation’s secular bear deleveraging cycle is likely to continue having its way with the world for a while longer yet.