The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
Got my chips cashed in
Like the do-dah man
More or less in line
Just keep truckin on.
- Grateful Dead
I went to a Dead concert once. It was truly an experience.
You couldn't call it exciting. You certainly couldn't call it boring.
The word "mellow" seems cliché, but appropriate.
The economy today is in about hour three of a true Deadhead experience: Nothing happening seems unexpected. Nothing expected seems about to happen.
For those of you too young to attend the original, welcome to the Deadhead economy.
The Year that Wasn't….
The last twelve months have been similar to the previous two years as economic activity and prospects for a "rebound" continue to disappoint. Economists and other pundits educated in America's age of "Modern Portfolio Theory" are brainwashed to believe "reversion to the mean" is as unavoidable as taxes and death. Take a look at all the long-term forecasts for activity and you'll find a striking similarity that within two, three, four, or perhaps five years the economy will be back to normal at 3 percent growth, 6.5 percent unemployment, and higher, but stable inflation.
Reversion to the mean is a theory - not a preordained right.
Experience over the past few years is the best evidence of the absence of reversion.
Turning to factors we humans can affect, 2012 was disappointing on many fronts even as the economy continued to muddle along with all too many expected occurrences remaining absent.
Economic stability followed by a quieter Fed was not to be as the central bank delved deeper into the dark recesses of monetary policy, hopefully leaving breadcrumbs to help navigate its way out. In the last quarter, the Fed has initiated one open-ended bond buying program (dubbed QE3 or QEternity for those more cynical), and then another (to replace and enhance "Operation Twist").
Those expecting more clarity around ACA and DFA (Washington-speak for Obamacare and financial reform) were mostly disappointed. The more than half of these United States who challenged ACA's constitutionality were rebuffed over the summer, yet the majority of rules on both landmark legislations remain either unwritten or unbelieved. (full disclosure: SVB is putting forth efforts to alter the upcoming medical device tax).
The wave of fear swamping the old continent crested and has fallen back, but not for rational reasons when a long term perspective is taken. True, there is no immediacy of (additional) default or exit by the seventeen nations bound by the euro. But also true is the contention that nothing has altered the primary challenges that make the currency union untenable. In short, these are immobility of labor and capital. Until Spaniards willingly and proactively move to Germany to fill job shortages and until the banking industry is not prohibited from investing in higher return (and higher risk) regions, the euro remains a doomed currency.
Resolution or dissolution? The market remains uncertain.
Funding markets remain challenged, especially the exit markets. Global IPO issuance suffered with proceeds falling nearly 30 percent to $97 billion, the lowest since 2008. Much of the decline on the global stage came from a fall in Chinese IPOs as that sector suffers from accounting (let's call them) irregularities. In the United States, IPO issuance grew slightly, benefiting from Facebook's massive $16 billion offering in May.
The unemployment rate fell significantly during the year, but primarily because more and more people stopped looking for work. According to nonfarm payrolls, the country added just 1.66 million workers or 1.3 percent and total employment at 133.9 million remains far below 2008's high of 138 million. Fewer people working, more retiring, and a government unable or unwilling to address long term entitlements is not a good combination.
On the positive side, valuations regained their upward momentum during the year with stock markets around the world up 10 to 20 percent through mid-December. Corporations retained a significant cash hoard in case of further downturns. Banks improved capital and liquidity positions in most of the world. And consumers retained a desire to own the latest gadgets.
It's this last item that should be most appreciated. A prolonged period of deleveraging risks consumers turning insular. If you think this would be desirable, I challenge you to name an industry that can thrive without consumers.
…And the Year That May Be
With every New Year comes potential. In most of the country, winter weather breaks. In the business world, old goals are reviewed and new ones determined. Yoga, pilates, and spinning classes are near impossible to join. Hope - as they say - springs eternal.
For several years, I was labeled an optimist. But not the most recent several years.
Even pessimists have wish lists. Here's mine:
- Complete all rule-writing for DFA and ACA
- Resolve all fiscal cliff items and develop serious engagement on entitlement challenges
- Propose practical solutions and debate the future of housing finance (not just the future of Fannie/Freddie)
- Create clarity on the future of the Eurozone
- No escalation of Middle Eastern conflicts
- No globally important natural disasters
Oh yeah, and given this is being drafted on December 20, I'm really really hoping the world doesn't end tomorrow….
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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