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It is not about the economy!
November 05, 2012

Untitled Document

From an economic point of view, it really doesn’t matter who will be the next president of the USA.  The economy is showing signs of improvement and we probably will continue to muddle through. This has been a constant theme of my newsletters, which is not to say there are not headwinds and risks, but all things considered, the U.S. is doing better than Europe, China and some emerging markets.

The economic indicators are mixed, but I want to focus on those that show improvement. After a slowdown in the summer, unemployment went down and consumer confidence went up. The U.S. home-builders' confidence index rose to its strongest level since June 2006 and industrial output last month rose 0.4%, much more than expected. Furthermore, and more importantly, there was also an increase in new house constructions and building permits. Housing starts might be one of the most important indicators because it has a large impact on the economy. The GDP came in at 2% and consumer sentiment is the highest since 2007. The bad news is that businesses are accumulating cash and are not willing to invest.

The earnings season is as bad as predicted but as some companies announce their earnings and give guidance to the market, we will get more clues on what is going on in the economy.

For instance, when Yum announced earnings (you might not know YUM but you certainly know the brands it operates:  KFC, Pizza Hut, Taco Bell) it was clear that sales in China were down, and their guidance for the fourth quarter showed that they were expecting further weakness in that region. However, the U.S. showed unusual same store sales growth, especially KFC and Taco Bell. It seems that the American consumer is more confident and is spending more on fast food.

When JP Morgan announced their earnings, its CEO remarked on the growth in its mortgage-banking unit, which rose 57% when compared with last year. Wells Fargo showed the same thing: a 22% jump in profit largely due to their mortgage business.

With the Caterpillar announcement, we learned that sales in North America were bigger than in prior quarters and bigger than any other region. During the call, the managers said construction in the U.S. was a “bright spot”. More importantly, they see 2013 following the path of 2012, referring to the “muddle through” we have been experiencing in the past couple of years. Construction-machinery sales were flat because an increase in North America sales offset a decrease in China, while Latin America was flat. When DuPont announced their results they blamed the huge miss on China: according to them the Chinese economy is stalling, which of course is bad news for the rest of the world. Commodities are down and the only exception is lumber, propelled by the housing market’s slow recovery.

This brings me to Brazil. The country is suffering the impact of the economic slowdown, particularly the after-effects of China. The Central Bank continued to cut rates, bringing them down to 7.25%, a historic low. That doesn’t seem enough to restore growth, as showed by the decline of 1% on industrial production last month. However, it is enough to change the investment field in Brazil. Until recently, you didn’t need to do or know much to have 4% to 6% real returns. Now, it is going to be very different and there will be a hunt for returns.

In regards to the USA, although anecdotal, it is worthy to observe that when you look around, at least in places like New York or Miami or Los Angeles, it seems that everybody is driving their cars, going places and spending money. I’ve been travelling a lot lately and wherever I go, at least on the East Coast, restaurants, roads, stores and hotels are packed. About the roads: anytime of the day, any day of the week, I‘ve been stuck in traffic, notwithstanding the fact that the price of gas is in its highs. Companies have a lot of cash and are still borrowing at ridiculous rates. The same is true for the US Treasury and – sorry Republicans – the downgrade didn’t have any impact on the Government’s ability to finance itself.

This brings me to the elections, again.  There is a “new Romney” running for President, one trying to convince the independent voter that he is a moderate conservative who knows what it takes to create jobs and improve the economy. Well, the economy will create jobs and improve regardless of Romney and his policies, if he is elected. The bad news for those who believe in Romney’s miracle is that the economy still has way too much debt and the improvement we are seeing is based on unrealistic interest rates that lead to inexpensive credit. My point is that although I think the economy is muddling through, it is also vulnerable and a bad maneuver can bring us back to abyss very easily.

On the other side, Obama is fighting against ignorance, naiveté and fantasies, and those fights are hard to win.  There are people who believe Obama is a socialist. There is a despicable ad on television suggesting that the United States is close to be transformed in a communist country.  If he is a socialist, he is doing a very bad job of it.  Government jobs declined during his administration as well as Federal Government spending as a percentage of the GDP. According to a chart published in the Wall Street Journal last Saturday, Government spending came down from 13.5% in the 60’s to 8.2% currently. Naiveté arises because people believe that Republicans know better on how to improve the economy, and finally the fantasy exists in the belief that Republicans will take care of the deficit. Once in the White House, if that happens, Republicans will forget everything they preached about controlling the deficit and they won’t care. Let’s remember how we ended up the last time a Republican was in the White House.

The danger of a Romney victory is that we are going to go back to themes that were settled decades ago, like abortion rights, which should not be up to discussion anymore; or themes that were just settled, approved by the Congress and ratified by the Supreme Court, like health care. What else are we going to discuss again?  The 1964 Civil Rights Act? The right to vote appears to be in the Republican radar: there were 180 restrictive voting bills pitched since 2011. So what is next, maybe another war? If you care about any of those themes, there should not be any doubt in your mind about who should be the next President.

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Of Protests and Stocks
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Betting in the future
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Nowhere else to go
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Cyprus: not enough to stop the US market
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The Sequester
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2013: what is ahead for investments
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The New Normal
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