Keep it Simple

Keep it simple - the “fiscal cliff,” problems of the E-Z, East coast weather – all, already priced in the US fixed income market. The odds were never more than 15% for an off-the-cliff fiscal event. Some compromise will be reached – kick the can. Something will be worked out for Greece; that problem was priced in weeks back. France’s bad luck is a non-event for our mkt. The East coast will recover (but the process will add little to nothing to GDP). These things provide fodder for media types but end there. 

What is not on most radar screens, what observers have yet to come to fully understand is the regulatory cliff just ahead and its impact on CEO attitude, on job creation and, on consumer activity. Better to anticipate the headlines, than react.

Most are aware of some retardants provided by Obamacare – pay the penalty or cut the hours, cost increases in the form of a lower FSA cap of $2500, 1/1/13, etc.  But there is much more. Henry Miller, a physician and molecular biologist and a fellow at Stanford’s Hoover Institution, tells us that, “The administration has already imposed an array of dubious…regulations that will cost consumers tens of billions of dollars. Some of these in the form of hidden tax increases such as user fees for industry such as drugs, biologics, medical devices and food…”  We have already highlighted the effect of the catastrophic 2.3% excise tax on medical devices, a tax not on profit, but income! This will naturally be passed on to the consumer.

Next, Susan Dudley, director of the George Washington University Regulatory Studies Center says that about 35% of new regulations with an impact of $100MM or more per year have yet to be enacted, postponed for the election.

So it’s easy is it not? We have an interventionist administration. CEO’s are there to take to the field which means taking risk, something they are paid to do but not if the rules for the next quarter have yet to be written.

It is important that strategists understand this simple dynamic and its very deleterious impact on risk takers; when this is compounded by the existence of a central bank which combines industrial policy (assistance to select firms and industries) with money printing, no wonder, as the WSJ noted recently, that 40 of the nation’s biggest corporate spenders have announced plans to curtail capital spending in 2013. No wonder these types run for cover. No wonder hiring is going nowhere.  No wonder discretionary spending will wilt for goodness sake.

See your trades accordingly.


Robert Craven