May 23, 2013

May 23, 2013

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Tax Receipts and Spending Cuts Improve U.S. Budget Picture — For Now

The budget pressures that have led to partisan brinksmanship over the debt ceiling and tax increases are easing.  April — tax month — has historically been a month of surpluses, though those evaporated in the years immediately following the financial crisis.  Last year, April’s surplus was $59.12 billion; this year’s surplus was $112.89 billion, outstripping the expectations of analysts.  The Congressional Budget Office estimates a fiscal 2013 deficit of $845 billion — the first deficit under a trillion dollars in the past five years.

The improvement is coming from a number of sources.

The first source is higher revenue.  Payroll taxes are up after January’s expiration of the 2 percent payroll tax cut; income taxes are up on wealthy households; and improved employment and wage figures are leading to increased receipts as well.  From October 2012 to April 2013, the economy added about 1.4 million jobs.  Prior to the tax increases that took effect in January, many bonus and dividend payments were pushed into December 2012, which has given April 2013 collections a further boost.

Given the current (and likely continuing) dynamism of the U.S. stock market and the generally positive psychology of investors, we anticipate more speculation in the immediate future, and more tax receipts from investors cashing out short-term capital gains…

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Janet Yellen: Bernanke’s Next-in-Line Leans Even Further to the Doves

With Ben Bernanke’s chairmanship of the Federal Open Market Committee (FOMC) ending at the beginning of next year, speculation is rife about who will be appointed as his successor.  Some think that Bernanke himself might be persuaded to accept another appointment, although he has publicly distanced himself from the possibility.  He said recently that he feels no responsibility to preside over the future exit of the Fed from its unprecedented program of quantitative easing, currently buying U.S. Treasury bonds and mortgage-backed securities at a pace of $85 billion a month.

Some suggest his replacement may be Stanley Fischer, Bernanke’s thesis advisor at MIT, currently the Governor of the Bank of Israel.  Tim Geithner and Larry Summers have also been mentioned.  However, opinion polls of analysts and Fed watchers consistently place Fed Vice-Chair Janet Yellen as the most likely pick.

Yellen, a long-time economics professor at UC Berkeley, was first appointed to the Fed’s Board of Governors by Bill Clinton in 1993, and served as head of the San Francisco Fed from 2004 to 2010.  Before Bernanke’s 2010 re-appointment as Fed Chair, she was widely seen as a top contender for the post.  Picking Yellen now would help assuage the opinions of Obama critics who chide him for inadequate gender diversity in his high-profile nominations.

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Consumer Demand Boosts Japanese Growth; Companies See Increased Profits on the Horizon

Shinzo Abe promised Japan a “three arrow” policy to bring it out of its long deflation — fiscal stimulus, quantitative easing, and structural reform.  We have yet to see exactly what the third arrow is going to look like — he is due to bring out his proposals next month.  But the first two arrows have already hit the target — especially the second.  Under über-dovish Bank of Japan Governor Haruhiko Kuroda, aggressive monetary easing has led to a sharp decline in the value of the yen, and a blistering rise in the Nikkei.

At Just Over 15,600, the Nikkei Has a Long Way to Go to Reclaim Its Highs

Source: Bloomberg

Judging from first-quarter data, consumers have been the first to respond, while predictably, Japanese corporations are being slightly more cautious.  Companies are drawing down inventories and still holding back on investments, but we believe a big rise in corporate profits is visible on the horizon.  Net income for the top corporations tracked by the Nikkei 225 index rose 51 percent year-over-year in the first quarter, according to Bloomberg.  Japan, Inc. is looking at a revival as the falling yen sparks new life for the export machine.  Corporate profits will also be driven by the new enthusiasm of the Japanese consumer — and it is there, in consumer spending, that we can see Abenomics’ “first fruits.”

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Guild Basic Needs IndexTM

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The April 2013 GBNI data should be available soon.  If it looks anything like the wholesale prices or PPI data we discuss above, expect a slight drop in our data as well.

In this week’s Premium Global Market Commentary available to Gold Subscribers, we discuss:

  • Derivatives Risk: Still the 800-pound Gorilla in the Room

    Last Friday the Commodity Futures Trading Commission (CFTC) passed new rules regulating derivatives trading by a 4 to 1 vote.  As part of the elaboration of Dodd-Frank Act, regulators have been hashing out the details of a new derivatives regime — and the present results are not encouraging…


  • Real Disposable Income is Up — and U.S. Consumer Sentiment With ItApril’s estimated 0.4 percent drop in the CPI, combined with a 0.2 percent gain in personal incomes, nets to a 0.6 percent increase in real disposable personal income (RDPI).  This likely means an increase in consumer spending in the near term — and that means, eventually, more manufacturing activity.  It also means improving consumer sentiment, which has been climbing back towards levels last seen in better days. 
  • Gold’s Down, But Who’s Buying? 
  • Newly Implemented Executive Summary 
  • Guild’s Premium Global Market SummaryIs it time to take the money off the table?  Find out what we think about the markets today and the industries we think are attractive.

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