Showcasing Congress’ partisanship and ineptitude, Republicans and Democrats have thus far failed to reach an agreement on the impending fiscal “cliff”. If a deal isn’t done by year-end, a barrage of spending cuts and tax increases will go into effect January 1. Thanks to the debt ceiling deal Congress struck in 2011, $1.2 trillion in spending cuts will automatically occur, while the expiration of both the Bush tax cuts and the Obama payroll tax holiday will deliver significant tax increases. The inability to reach an agreement and to leave negotiating to this last hour of the year is both absurd and well-fitting. As philosopher Joseph de Maistre said, “Every nation gets the government it deserves.”
So long as a compromise is reached early next year, the damage to the economy will be manageable. But a prolonged battle, coupled with another fight over the debt ceiling, which will come under pressure next year, could be large enough of a shock to throw the U.S. economy into a considerable recession. We expect Congress to reach an agreement by the end of January–an agreement that will still contain tax increases and spending cuts that will be a burden on an already weak economy. Fortunately, the economy appears to still be muddling along.
U.S. private sector employment rose by 147,000 during the month, outpacing just about every economist’s estimate. Hours worked and hourly earnings rose as well. Initial unemployment claims have been affected by Hurricane Sandy, but still reflect a resilient economy. Housing and auto sales remain bright spots in an otherwise mediocre economy. Manufacturing and core capital goods orders, on the other hand, have been notably weak. For the most part, the economy appears to moving along as it has over the course of the recovery: slow but steady. The Economic Cycle Research Institute’s Lakshman Achuthan and the Hussman Funds’ John Hussman continue to beg to differ.
The pair, respected for having correctly predicted the 2008/2009 recession, believe the U.S. economy has entered recession. There are of course certain indicators that signal weakness, including the aforementioned manufacturing and orders for core cap ex, but broadly speaking, leading indicators remain positive in our opinion. Mr. Hussman began warning of recession in 2010 while Mr. Achuthan first warned in September of 2011. For their part, the two might be early–extremely early. We simply do not yet see recession in the data and expect the economy to continue to forge ahead.
During the month of November, Black Cypress equity portfolios rose eight basis points. For the year, our composite is up 15.3%, while the S&P 500 is up 14.9%.
We own a diverse assortment of high-quality businesses yielding over 3.0% with reasonable margins of safety. Our downside is further managed by our proprietary macroeconomic model that continues to signal economic expansion. How else can you plan for the possible idiocy of Congress?