Happy New Year! It’s a short week with a skeleton crew here at Money Morning headquarters. That means this edition of Money Weekend will depart from normal form. Instead of summarising what appeared in Money Morning this week, I’ll give you a quick tour of the big stories directly, with some analysis of what it might mean for the Australian share market in the first quarter of 2013.
It’s early days, but the first few trading days of the year have been a clear win for ‘risk’. This is pretty much the plan of global central bankers. Lower interest rates and drive people out of cash and savings and into stocks. And with the Australian dollar making a move against the US dollar and the Japanese Yen, Aussie stocks may be getting an additional hunt-for-yield-bid from global investors.
All of this money flowing into stocks prevents what would otherwise be happening: deflating asset prices. If you look at the global economy, which grew at just 2.2% in 2012, it’s hard to make a good argument for buying stocks – unless stocks are the least bad option for preserving the value of your money during a global currency war. My own personal view is that a big deflationary shock is in store for investors. That’s the case I’ve made in Exter’s Prophecy. But for now, it’s all about rising stock prices.
Well the good news is that this may the last time you ever have to read the term ‘fiscal cliff’. By a vote of 257-167 the US House of Representatives passed a bill to avert the hyped-up scenario where taxes would rise and automatic spending cuts would kick in on the US government. The House passed a bill negotiated by the Senate and President Barack Obama. The net effect of the bill is to raise US taxes by about $600 billion and add $4 trillion to the total US debt over the next ten years.
In other words, it’s a bogus deal that only fulfils Obama’s promise to raise taxes. But that hasn’t stopped stock markets from loving it. In the first full trading day of the year, the Dow Jones Industrials rallied over 300 points and 2.35%. Australian stocks have followed. The deal takes away one of the key anxieties of investors. A bigger rally can’t be ruled out from here, which I’ll get to in a moment.
But oh by the way, get ready for another round of ‘debt ceiling’ anxiety. Raising the statutory limit on the amount the US government can legally borrow was NOT part of the cliff deal. And that limit – $16.39 trillion – was exceeded on the first day of the New Year. The US Treasury department can shuffle money around from place to place for a month or so. But by mid-February, the Congress will have to raise the debt ceiling again.
That means you’ve got another immediate (if artificial) deadline that, if not met, results in the US government being unable to borrow. If you thought the ‘fiscal cliff’ political battle was bruising, wait till you see the ‘debt ceiling’ battle. Jilted and angered Republicans will see this as their next best chance to actually cut government spending, instead of just raising taxes.
If form holds, the Republicans will cave, the debt ceiling will rise, and stocks will love it. However credit ratings agency Moody’s and the International Monetary Fund are both warning that the US hasn’t done enough to solve its fiscal problems and that the AAA credit rating of the US Government is still in the crosshairs.
Dan Denning,
for Money Morning Australia
P.S. Your regular edition of Money Weekend will return next week. In the meantime, enjoy today’s special instalment showing why Australian stocks are powering ahead. And if you want to read the opposing point of view, or why 2013 could end up being quite bearish for ‘risk’, have a look at Exter’s Prophecy.
