Cliff” Deal Good News, But Caution Advised Until Debt Limit Raised
New York , NY (PRWEB) January 03, 2013
John Thomas Financial Chief Economist, Mike Norman, said that the fiscal cliff deal removes some uncertainty from the markets, but caution may be warranted in the short term. Norman says the deal probably adds an additional 1.5% of fiscal drag to the economy. We’ll still remain growth positive, said Norman, but well within the slow growth levels that we have become accustomed to. More importantly, we will avoid a recession, which would have been a near certainty if a deal had not been reached.
Norman says that the fiscal drag will come primarily from the expiration of the payroll tax cut. “That added about $100 bln to personal income, so we will be losing that,” he said. The remaining drag will come from tighter rules on deductions and fees related to Obamacare. In addition, he mentioned that the whole thing is dollar bullish. “You’re imposing a layer of austerity,” he said. “And austerity tends to be bullish for currencies.” A rising dollar could put a crimp on corporate profits.
The real hurdle according to Norman is the debt ceiling. He cautioned that if the debt ceiling doesn’t get raised it could be quite negative. According to Treasury Secretary Timothy Geithner, the U.S. hit the statutory debt limit on December 31st and Treasury is now having to adopt “extraordinary measures” to manage the nation’s obligations. The way to think about it, says Norman, is if you lost your job or some other income stream, you might elect to pay certain bills, like the electric bill and mortgage and hold off on paying others. Norman said that Treasury will be sure to make payments to bond holders first so as to avoid default and then pay what it can out of tax receipts. However, there is a $1 trillion gap between tax revenues and expenditures. “Some vendors and other recipients of government checks might not get paid in a timely fashion and that could ripple through the economy,” he added.
We saw how it played out last year. Treasury hit the debt ceiling at the end of May and by July the economy and the markets took a swoon. Norman is concerned that we could follow the same script this time around if the debt ceiling issue is not resolved quickly.
Despite the risk, Norman does expect the debt ceiling to be raised, but probably only with a compromise that includes promises of hefty spending cuts that would go into effect in future years. “Once the debt ceiling is raised, the final obstacle to a powerful stock market rally will be in place. Until then it could be a little choppy.”
About John Thomas Financial:
John Thomas Financial, a member of FINRA and SIPC, is an independent broker-dealer and investment banking firm headquartered in New York City's Wall Street district. Emphasizing a client-centric approach to managing all aspects of its business, John Thomas Financial and its affiliates offer a full complement of retail brokerage, private wealth management, and corporate advisory services tailored to the unique needs of its clients. The firm publishes the Fiscal Liquidity Index, a unique daily indicator that looks at government spending and its impact on the financial markets,The Kaufman Report, a weekly technical stock market analysis, and The John Thomas Financial Economic Outlook, a report analyzing consumer sentiment, market outlook, credit cycles and dozens of other market influences.
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