Populist Inequality

The Tax Policy Center estimates that 50% of the benefits from the Trump tax plan will go to the top 1% of households – those earning more than about $700,000.  Consequently the plan will reduce federal revenue by an estimated $3.5 trillion over 10 years (WSJ).  The plan has only 3 tax brackets, aligned as the red lines over current tax policy.  The lowest bracket would move up to 12% from 10%, while the top three brackets top out at 33%.


The Crude Truth

Oil’s effect on US growth has been debated heavily, and this week’s Barons suggests that while the initial effect of boosting consumption will help the economy, the ripples of less shale production will eventually drag on economic growth.  This will effect the numerous energy beneficiaries including railroads and truck driving.  Nevertheless JP Morgan is more positive, estimating every 10% drop in oil contributes .25 to GDP over time.

Oil prices have so far declined 30% from their late June peak as US production increases,  jumping past 9 million barrels a day last week for the first time since 1986 (EIA).  This narrows the gap between the US and #2 producer Saudi Arabia (producing at 9.7 million barrels/day) while Russia remains the leader (10.1 million barrels/day).

Domestic production has jumped 60% over the last 5 years due to breakthroughs in hydraulic fracking and horizontal drilling.  The industry directly employs 213,500 people as of October, doubling over the past decade.  This incredible leap in US production has weighed heavily on net oil imports, averaging 5.2 million barrels of oil a day so far this year (through August) compared to 12.6 million over the same period in 2006 (a reduction the size of Iran & Kuwait’s daily production).

On a shorter term basis, petroleum imports are down 7.5% this year (compared to the same period last year, through September) while petroleum exports are 15.4% higher.  The US exported an average of 2.7 mm barrels of oil a day (June) just shy of its record 3.1mm barrels last December (export ban?).

Nevertheless cheaper energy will continue to stimulate lower income households and energy intensive industries such as airlines, chemical companies and utilities, creating a far greater net benefit for the economy over the long term.  Capital spending from the oil and gas industry totaled 0.8% of GDP last year up from just 0.3% in 2013.  This marks the highest level since the oil boom in the early 1980s even though cap ex will fall back next year due to lower oil prices.

Cheaper energy can solve the world’s problems, from effectively sanctioning Russia to alleviating income equality as oil companies lose profits and low income households gain discretionary income.  Not to mention bankrupting the numerous oil-cursed, economically and politically stagnant countries dependent on the commodity for income.  Lower oil can literally do it all.

March 19-20 FOMC Meeting

FOMC GDP forecasts

WSJ 3/21/13 

            FOMC Meeting:  The committee voted 11-1, holding policy at 0-0.25% and continuing QE programs.  Ester George dissented, as expected.  While continuing the $85bn ($40bn LT treasuries & $45bn MBS purchases) Bernanke warned these purchases would adjust as economic activity improved.  Such orchestration will nevertheless begin once the job market shows fundamental improvements.  “I think an important criterion would be not just the improvement that we’ve seen, but is it going to be sustained for a number of months?” Bernanke wondered aloud.  While unimpressed with the extent of employment recovery so far, he also holds little excitement for stock’s recent rally, pointing out that inflation weighted indexes are nowhere near record highs.

            FOMC members agreed that moderate economic growth would resume after the 4th quarter slowdown, as consumers and businesses increase spending, housing grows and employment expands.  Amidst this growth longer-term inflation expectations remain anchored under 2% for the next 3 years, enabling the Fed’s expansionary policy to remain focused on its employment target.  Bernanke noted that fiscal policy has become more restrictive to growth in 2013, estimating a total fiscal impact of -1.5% to this year’s growth.  Consequently their 2013 GDP estimate dropped to 2.6% from 2.7% despite becoming more bullish on employment, forecasting a 2013 unemployment rate of 7.4%, down from 7.6%.  The text “easing financial conditions” was removed from the statement, perhaps indicating FOMC members see little US fallout from the Cyprus credit-crisis.

Bernanke addresses Ester George’s worries that the QE program proposes “risks to financial stability, if persistently low rates lead some market participants to take on excessive risk in a reach for yield.”  Nevertheless he did not mention if such bubbles were forming (see Higher Yield).

Bernanke’s term as chairman expires in January 2014 and expectations foresee no third term for the recession weary combatant.  History suggests Bernanke will not change policy before his successor takes over, suggesting no QE adjustments until 2014.  He admits, “I don’t think I am the only person in the world who can manage the exit.”

GDP: March Change from December
2013: 2.55% -0.1%
2014: 3.15% -0.1%
2015: 3.3% -0.05%

The Grand Bargain’s Fiscal Timeline

“The White House has said it won’t negotiate a fiscal deal tied to an increase in the debt ceiling, like it did in 2011.  Nonetheless, lawmakers see the coming debate as perhaps the only impetus for action on a broad fiscal agreement, setting the early summer as a focal point for talks.”      -WSJ,  3/16/13

The ivory tower in Washington stands tall yet within its confines bustle confused and arguable members.  A building that instills such confidence yields congressmen and system so dilapidated.   A big task lies ahead, and unfortunately political history precludes disaster.  The president visited the Capitol building three time last week, meeting separately with each party’s lawmaker to delicately lay a framework toward agreement. They have until the summer to compromise on a 2014 budget and while that looms far in the horizon, the memories of failure are fresh: August 2011, 16%, 2-week market crash and US credit downgrade.

Both parties focus on strengthening the economy however their pursuits differ.  The Pew Research Center tallies that Democrats favor improving the job situation (84% of Democrats say it is a ‘top priority’, 77% for republicans).  While Republicans believe in deficit reduction (84% of Republicans say it is a ‘top priority’, 67% of Democrats).  Reducing the deficit is more than halfway down the list of Democrats top objectives, under the environment, education, helping the poor, gun-control… Ironically deficit reduction was  the number one priority for Democrats a decade ago, however the culmination of a recession, war and a ballooning deficit were enough to swap the parties ideologies in 2010.  Democrats and Republican priorities are well reflected in their respective house’s budget proposals:

Senate Democrats: House Republicans:
$975bn new taxes No new revenue
Deficit cut $1.5tn over 10 years… Deficit cut $4.6tn over 10 years…
$100bn stimulus No stimulus
Cut $218 from Domestic Agencies Cut $571 from Domestic Agencies
Cut $240bn from Defense No defense cuts
Cut $275bn from Healthcare Cut $2.7tn from Healthcare (repeal Obamacare)
Replace sequester with cuts and revenue. Leave sequester in place except for defense department

Possible Similarities:

  • Overhaul tax code
  • Means-testing Medicare benefits
  • Changing Social Security’s inflation calculation

Even when both parties agree on an item to cut, they disagree how to use the proceeds. Democrats propose to reduce the deficit while Republicans suggest offsetting further tax cuts.  Obama last week advised that their “differences are just too wide.”  Top Senate Republican Mitch McConnell said of the Democrats proposal, it will “entrench government waste and cronyism, rather than root it out.”  The fervor is palpable. Both houses expect to pass their polarized budget bills next week but nobody expects any debate until the summer deadline nears.

Next week, in the final days before a 2-week recess, legislators are separately expected to extend federal spending through September 30 to avoid government shutdown.  This continuing resolution funds the government through temporary extensions of current discretionary spending programs.  Currently expiring March 27, both houses are expected to pass bills too continue the resolution this week.  This is no new business: continuing resolutions have been signed every 6 months dating back to October 2010.


  • March 27:    Continuing Resolution expires.
  • April 8:         Week Obama releases his budget blueprint.
  • May 18:         Deadline up to which Federal law allows government to borrow money.
  • July-August:    Treasury can fund congress through emergency measures (if no deal).
  • Post-August:    Debt-ceiling must be raised to fund government (if no deal).

After that, 2014 Midterm elections will polarize both parties, forcing them away from the bargaining table and toward their electorates for votes.  Similarly in 2015, Obama’s leverage could fade as parties prepare for 2016 presidential elections.

Continuing Resolution

As the sequester deadline passed on Friday with no compromise, focus shifted to the March 27 budget deadline and keeping the government in business through September.  A Republican bill could get the House’s vote as early as this week, a promising start.  Nevertheless it is disconcerting that a deadline controlling $1.2 trillion in cuts over 9 years can pass by so easily as it did last Friday.

“For now, however, the White House and Republican leaders seem to see eye to eye on just one issue: the importance of reaching a separate agreement to fund the government through the remainder of this fiscal year and avoid a politically messy shutdown.”

-FT 3/4/13

The Most Amazing Trade Deficit

December Trade Deficit: $38.5 billion.  The trade gap narrowed by 20.7% from November as petroleum imports fell to the lowest level since 2007.  That is huge news for politicians claiming energy independence.  And there is more gold in this report, including 4Q GDP revised higher to around .3% growth, a manufacturing uptick and best of all the energy independence could boost the nations long term growth rate (so says the WSJ).  America is on a great path, unfortunately this report will never sustain these results and next month’s will be back to more usual $45 billion readings.  But this could be a nice start for 2013.  Over the past year, exports are up 4.9% and imports are down 2%.

Exports: $186.4 billion          +$3.9 billion, +2.1%

Imports: $224.9 billion           -$6.2 billion,  -2.7%

Stage Set For Budget Battles In Developed World

Natixis February Update.  Forecasting 2% growth for the US, 1% for the UK and Japan, and nothing at all for Europe, Natixis disagrees that world trade will be able to invigorate economic activity in the second half of the year.  There are 3 main hurdles for the US economy in the first half: the sequester, Continuing Resolution and debt ceiling.  All 3 of these will be dealt with at the very last minute.  The Continuing Resolution and debt ceiling must be dealt with or the US economy could see another downgrade, while the sequester is already priced in (they use lower multiples on government funded companes like healthcare and defense for example).  The sequester will take 0.5% off GDP, but looking at the actual BEA GDP report, government spending already took off 67bps in 2011 and 34bps in 2012.

The key in their European outlooks revolves around fiscal tightening in a recession, if that has a disproportionate impact on growth, and if world trade can help spur demand in the region.  They believe that the steep austerity measures, particularly in France, will lead to a deeper recession, while world trade will do very little.