Tuesday, November 20, 2012

Fiscal Cliffs of Insanity!

You Keep Using That Word
Europe, mired in debt, confusion and hostility has been dethroned - however temporarily - as the king of political theater.  The title has been usurped by the once perennial bell weather, the United States.  The news media has classified the proceedings up until present as a can-kicking episode.
There is a debate about what the revenue increases and budget cuts really mean.  How will they affect the markets and will it throw the United States into recession?  How about a brief excursion into some available data from the past? 
I don't like making predictions (except in the case of Europe), I prefer to anticipate events.  So I want to know: will the fiscal calamity lead toward a stagnant stock market?  And will that lead toward a recession?
I Do Not Think It Means What You Think It Means

Historical budget balances from 1792 to present. Some trends are interesting, some what predictable and somewhat dubious as far as future correlation is concerned.  Budget balance as a % of GDP (red) and the nominal dollar value (blue).
Will we really see a budget balance of -50% within our lifetime?  Analysis from the above chart seems to indicate that we will.  I don't think it will happen, at least in the next few years, talk to me after 2015.  There is a post-WWII trend I refer to as the Military Industrial Complex.  Actually, that wasn't me, that was Dwight Eisenhower who stated that historically the United State military contracts after each major war - except in the case of WWII.

1957 to 1982 - budget balance as % of GDP (blue) and S&P 500 (red). The two seem to correlate between the post early-1960s recession to the inflation ridden late-1970s.

1982 to present appears to have a strong trend between the budget balance as a % GDP (blue) and the S&P 500 (red).

My analysis, from the above data, is that the US will not slip into recession on account of a fiscal contraction.  I am anticipating stock market volatility over earnings and projections, and I anticipate that the bond market will remain in its yield-depressed state.  But if the contraction in government issued debt happens, where will investors go?
If I were to make a prediction, I would say that we are already in recession (the video in the link is from 2011).  I would also say that China is going to experience a real-estate deflating recession, and Europe, of course, will soon regain its title as king of the political theater.

Recession probability has picked up.

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