Wednesday, January 2, 2013

Some sober second thoughts during the party

As I write these words, most equity markets are melting up between 1% and 2% in Asia and Europe in the wake of the news of a "fiscal cliff" deal in the US Congress. While my Inflation-Deflation Trend Allocation Model remains in at an "inflation" reading indicating a risk-on environment, I am a very nervous bull.

Here are some thoughts to ponder:
  • Doesn't this deal set the United States up for more political drama at the end of February? Two months isn't a long time, even for a trader.
  • The payroll tax cut didn't get extended, which is an effective tax increase on the middle class. What will happen to consumer spending and consumer confidence? Isn't this contractionary for the economy?
Cullen Roche at Pragmatic Capitalism concluded that [emphasis added]:
  • If my rough math is right we’re looking at something in the range of $225B in cuts out of a potential $575B.
  • The total drag on the economy (using the CBO’s fiscal multipliers and Goldman Sachs estimates) is ~1.3%.
I know that risky assets are rallying in relief because it could have been worse, much worse, but isn't a 1.3% drag on the economy bad?

Don't get me wrong, I turned more positive on risky assets in November and have gotten increasingly bullish ever since. I am long and I am enjoying this party. Nevertheless, I am edging closer to the exit and keeping an eye for the cops, who will no doubt raid the joint.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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