"Cheer Up — There's Plenty of Good News"
That was the message in Greg Valliere's note to clients this morning. Greg is the Chief Political Strategist at Potomac Research Group; his note is a much-needed response to the pervasive gloom that has enveloped Wall Street. Here are excerpts:
• The U.S. economy is growing roughly at potential, about 2-1/4 percent. It may feel like a recession, but we most definitely aren't in one."
• State and local governments have weathered the storm (except for California and Illinois). Receipts are picking up but outlays will stay frugal; many states are starting to pile up surpluses.
• Housing has bottomed in much of America; in southern California there's a bidding war when houses come to market. The U.S. manufacturing sector is coming back, big time. So is energy production — the most under-appreciated story in America is in the Dakotas. Could the U.S. soon become a net energy exporter?
• Thanks to remarkably low interest rates, U.S. corporations have restructured debt and now have astonishingly strong balance sheets. Once there's certainty on tax policy, companies will open their wallets and spend robustly on new equipment and new hires.
• In the seminal political battle that has gripped America for decades — big government versus small government — the latter is prevailing. If Barack Obama doesn't get that, he won't win re-election. The electorate doesn't want Obamacare or new programs; it wants a government as small as possible. The pendulum has shifted dramatically on this in the past couple of years.
• There's widespread agreement — not just among Republicans — that public employee benefits have to be curbed. Rahm Emanuel gets it; so does Andrew Cuomo. Scott Walker is confrontational, but these reforms can be accomplished with less acrimony in most states and cities. Agreeing that there's a problem is half the battle; the reforms are coming.
• The big banks cannot again get away with what they did in 2008. Jamie Dimon will receive a public thrashing tomorrow, and the upcoming Volcker rule may be tough, but the bigger story is that there's no political appetite to bail out banks again.
• The fiscal cliff can be managed. Obviously, no one likes uncertainty, and the timing of a deal is unclear, but it's highly unlikely that the dividend tax will revert back to ordinary income tax rates. The most onerous tax scenarios are unlikely, and the hit to GDP from the fiscal cliff will be manageable.
• The U.S. budget deficit is falling. No one focuses much on receipts, but they're picking up — and with domestic outlays essentially frozen, with virtually no new spending in sight, the deficit as a percentage of GDP will drop sharply in the next couple of years.
• Europe won't bring the U.S. down. Angela Merkel may single-handedly save the union, but even if German voters rebel and the EU dysfunction persists, it will simply contrast with the better fundamentals in the U.S. America will continue to be a safe haven for investors."
Greg concludes by saying, "We'd be naive not to recognize the serious risks that abound, but eventually — perhaps after the election, once the "fiscal cliff" is resolved — a powerful bull market seems likely. The good news is starting to sprout up all around us; it will be apparent to everyone by 2013.
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