The Horror, the Horror

We noted end of 2012 that there was a “governor” attached to the US engine which would prohibit that otherwise resilient and vibrant economic machine from doing much past 55 mph, H1.  We expected the impact to be more immediate; nevertheless, it is upon us now.

An immediate payroll tax increase on the middle class and an outright tax increase of higher income types is part of the story naturally. And Obamacare’s taxes hit consumers and businesses 2014 with a wallop. Employers adjust – less hiring.  Consumers adjust, or will – less spending.

It is the ant-business agenda of the current administration which plays a large part to be sure and is represented through the impact of the “governor.”  But there is more; there is the awful unpredictability; actually, there is the madness of it all, this radical and failed experiment. We recall the words of Conrad’s Mr. Kurtz, the ivory trader in Heart of Darkness – “The horror! The horror!” referring to the damning madness about him. In economic terms this is the lack of an economic rule of law, both at the Fed and in Washington and is as much a horror as that delivered by the Congo interior, where there was no order and no control, only the omnipresent threat of death. Thus, many simply refuse to take to the field, refusing to be a part of a radical experiment less they become its victims.

In anticipation of this reality we had advised that clients sell (S-L) the term structure Jan/10 (5-10, 110, 2-30, 285) and again Feb/6 (113, 294) looking for that spread to contract substantially; but then the market crowd did not come to agree right away, and we recommended an exit Feb/13 (111, 295) not knowing just when the herd would turn. Now of course it has, in stampede-fashion, last 103, 267.

Finally, wild cards are always a threat; we all know that. Yet we may have one of a home-brewed variety just around the corner - the threat of bubble creation tied to planners at the Fed.  Readers may recall our Q1 survey where we reported that some staffers registered a concern, especially regarding real estate and stocks. Such a burst might just eclipse anything Iran, or N Korea or the E-Z can deliver.


Robert Craven