HOW STEEP IS THE US “FISCAL CLIFF”? – CREDIT SUISSE OUTLOOK
- This “is the biggest tax increase that would happen since World War II.” [Will McBride, Washington D.C.]
- The fiscal cliff is a strategic accumulation of tax increases, spending cuts, and reductions in tax loopholes to help reduce the federal budget deficit.
- Current legislation expires December 31, 2012 and the new tax regime will automatically be enforced, which is estimated to reduce the federal budget deficit by almost 4% of GDP.
- Credit Suisse believes that the best case scenario will only have a -0.9% drag on the economy in 2013, with the most likely case of a -1.5% impact on GDP and the worst case scenario of -3.9%.
- It is unlikely these tax increases and spending hikes would occur all at once.
- The Republicans are proposing to only include a reduction in tax loopholes and reduced spending, but NO tax increases.
- The Democrats are proposing no tax increase for families earning < $250,000, a minimum tax rate, cap on mortgage interest deductions and cuts in spending.
- JP Morgan predicts a 15% chance of “falling off the fiscal cliff.”
GLOBAL STOCK MARKET VALUATIONS
- Based on the MSCI All Country World Index:
- North American equities are reasonably valued at 12 times earnings based on price-to-earnings (P/E) ratios, with a dividend yield between 2-3%.
- P/E valuations outside North America are more compelling i.e. China (8.5), Brazil (9.3), Germany (9.4), and France (9.7), with impressive dividend yields in the 4-5% range.
- 10 year US Treasury yields have increased from the record low 1.39% recorded in July to over 1.80% in the last two weeks.
- Stefan Marion, Chief Economist and Strategist at NBF notes that US job reports, retail sales, industrial output and homebuilder confidence have all surpassed expectations in July and is the first uptrend in the economy in the past year.
- Stefan Marion believes that a fiscal stimulus is a “must for China”, and the announcement will come only after a change in leadership later this fall (no official date has been established yet).
- Credit Suisse economists believe that there is a 50/50 likelihood of additional quantitative easing in the US as economic data has been steadily improving.
- The Conference Board has reported that the US leading economic index grew 0.4% in July versus the 0.4% decline reported in June.
- Canadian inflation dropped in July, with core inflation at -0.3%, its lowest level since 2007.