Friday, October 5, 2012

What I Read Today - Friday October 5, 2012

Excerpted from The Business Intelligence Brief (BIB) prepared by Armada Corporate Intelligence (Armada) for the Missouri Society of Certified Public Accountants - October 5, 2012 issue.

Note from Steve:   I did not watch the first presidential debate on tv a couple of nights ago.  All my facebook friends want to talk about is Rominey winning or Obama losing.   I have not heard anything about the content of what either canidate actually said.   Therefore I found this article about what they didn't say very interesting.

The Six Things the Candidates Didn’t Talk About

This was arguably the best opportunity the voter has had to consider the economic policies of the two candidates for President. Given that the remaining debates are supposed to deal with other issues this may be the last time they will go toe to toe on the economy in this campaign. Even if this was the seminal moment on the economy there was more than a little missing from the exchange. From an economist’s viewpoint there were at least six areas that should have been dealt with in some way. Perhaps there will be more attention paid in the next five weeks but I wouldn’t hold one’s breath.

At the top of the list was a direct discussion of the fiscal cliff. It may be a little unfair to list this issue as both men talked about some of the underlying issues that led to the existence of the issue in the first place. Granted the issue of the debt and deficit got some attention with both men giving the impression that solutions can be found with either simply raising taxes or cutting spending. What was missing was conversation about the elephant in the room. If there is no solution developed for the immediate problem the US economy slides into recession for at least the first two quarters of the year and perhaps far longer. It is understandable that they did not want to open that can of worms in this limited format but one fervently hopes that at some point the conversation gets serious. It is next to impossible that a serious attempt to address the deficit can be developed in the next three months so it would seem high time that somebody said so and indicated that a new deadline will have to be established. It might have also been a good time to assert that something like the Simpson-Bowles plan should be adopted.

The second major issue that managed to escape the attention of the debaters is the crisis that keeps building in Europe. It is not that the President has any direct influence over the Eurozone. It isn’t clear that anyone in Europe has any direct influence over this debacle. The point is that what happens in Europe is going to have a major impact on the US regardless of what the powers that be in the US come up with. Consider the impact on the dollar if the euro collapses utterly. The dollar would almost immediately gain in strength and that would complicate the US recovery in a myriad of ways. Europe is 25% of US exports and imports and trade without that partner will be cramped severely. One can tell that many of the states on the eastern seaboard are already feeling the lack of activity by looking at the data that has been coming from the manufacturing surveys from the Fed systems in New York, Philadelphia and Richmond. It would have been nice to mention that this matters to the future of the US economy.

The next omission is a little less justifiable. For four years there has been nearly constant attention focused on the impact of the housing crisis. It is arguable that the recession started with the collapse of housing and it is certain that the mortgage fiasco triggered the banking crisis, giving rise to all sorts of unpleasant developments ranging from the creation of TARP to catastrophic rates of foreclosure, the ruination of a segment of the mortgage banking community, the chaos of the mortgage backed security and the government takeover of Fannie Mae and Freddie Mac. There has been some limited good news in the last few months as the price of homes have started to gain for the first time in years. That hardly means that the crisis is at an end and there is a great deal that has to be done to fix the system. There are still millions of people underwater on their loans, still too many foreclosures for the new home market to get a foothold and too many banks that are still sitting on toxic debt they can’t work their way out of. The fact is that a real
economic recovery is not sustainable as long as housing remains in a weakened and vulnerable state.

The fourth economic sector that seemed to be ignored was that of exports. In some respects the two almost regressed on this issue as it is always too much fun to try to out bash the other when it comes to China. This has certainly been the case in the campaign as both men accuse the other of being “soft” on China. Meanwhile the President blocks a Chinese company from developing wind farm in Oregon while at the same time bringing another complaint to the WTO on Chinese trade practices. The Romney campaign vows that it
will get tough and accuse China of being a currency manipulator. Much of this is pure campaign hokum. Obama has cut deals with China on trade and the US has cheerfully sold trillions of dollars of its debt to Chinese banks. Romney’s business interests have included China for years. It couldn’t realistically be any other way as China is the second largest economy in the world. The fact is that China is both rival and partner and requires a deft touch that neither man has demonstrated as yet. It is not clear how the two communicate that nuanced approach in a debate but the fact remains that the US economy needs exports to thrive and to have exports there have to be imports. Nations will not buy from those that don’t buy from them and the US has to evolve as a real global trade player one of these days. That means facing down the anti‐trade forces that exist in both parties.

Number five in the missing in action category is any real debate over what to do about inflation. This is not at all shocking given that even the Fed has been having trouble talking about the issue these days. There is nothing imminent just yet – core rates are still way below the Fed’s threshold. On the other hand it is pretty obvious that the consumer has been dealing with the issue off and on all year. The price of fuel has gyrated and has been a shock to the pocketbook at least four times this year. Now comes the threat of higher fuel
prices due to the drought. Add in the hikes in everything from education to health care and it is obvious that real inflation exists. More importantly even the inflation skeptics agree that the set‐up exists for a major inflation crisis in a year or two unless the Fed reacts swiftly and decisively when the time comes.

That leads to point six and it would have been pretty amazing if either man had taken the time to speculate on this. In 2014 there will be a new Fed chair as Ben Bernanke has made it clear that he wants to end his term in office and nobody is going to beg him to stay. Who is the next guy? More importantly what will the next guy represent? Would Obama select another inflation dove – someone like the Vice Chair, Janet Yellen? Would Romney pick a hawk, somebody who would start ratcheting up those rates? Maybe a Glen Hubbard or a Martin Feldstein. This will never come up in a debate but it would be nice to know the thinking of the two. 

The Business Intelligence Brief (BIB) is prepared by Armada Corporate Intelligence (Armada) exclusively for the membership of the Missouri Society of Certified Public Accountants (MSCPA). The MSCPA assumes no responsibility for the editorial content, and any such editorial content shall not be construed as an official position of MSCPA. Armada has taken all reasonable steps to verify the accuracy of the content of the information in the BIB, and therefore, Armada shall not be responsible for any errors or omissions. Armada is not responsible for any advertisement placed.

Armada Staff –Chris Kuehl, Keith Prather, Karen Sanchez P.O. Box 733 – Lawrence, Kansas 66044 –

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