Toto, ….. We’re Not in Kansas Anymore — Ted’s 2013 Prognosis

The infamous line from the Wizard of Oz, “Toto….. we’re not in Kansas anymore,” is a perfect lead in to discuss the economic, regulatory and political changes that already have and will take place in 2013. 2013 is all about change. Not everything is going to change, however. I still expect that the President and Congress will in some form kick-the-can-down-the-road when it comes to continued mammoth deficits and the escalating debt ceiling. Little will be done regarding entitlements or any form of tax reform other than charging those that pay most of the taxes to pay even more—as has already happened this year on January 1, 2013, as the House of Representatives approved an additional $15 billion in spending. And do not think that an ever-expanding debt ceiling is coming. There will be an ugly fight this year with a likely governmental shut-down in the coming months as Republicans make their stand on increasing the debt ceiling only in exchange for some form of entitlement reforms. I do not, however, expect a default on debt payments since that would cut the U.S. debt rating and increase interest rates—exasperating expenses and increasing the deficits.

And by the way, every American that is employed will pay more Payroll Taxes (Social Security taxes in 2013 will increase from 4.2 percent in 2012 to 6.2 percent of the first almost $114,000 of income), so there is in actuality a tax increase on all employed people in the country already in place—regardless what the politicians tell you.

Here are my expectations for 2013, and for some of these points, greater detail is provided in the next section.

  1. Foregoing another recession (and perhaps even despite another recession), the housing market recovery will continue. Sales of new and existing homes will add to recent growth in closings and prices will continue to increase. The number of existing home sales will be up 8 percent in 2013 (calculated on a 12-month moving average of the number seasonally-adjusted annualized rates reported by the National Association of Realtors®) while new home sales may increase up to 20 percent. Be aware though, that a larger percentage increase in new home sales is based on a small number of sales, and the increase is still a comparably small number. Existing home prices will rise 5 percent, while new home prices will jump 6.7 to 7 percent in 2013 (even 8 percent may be a low estimate). Housing affordability will decline (but still will be highly affordable given decades-low interest rates) and rents on residential properties will increase as 2013 progresses—and they will increase at multiples of the rate of inflation.
  2. Interest rates will go up. You can’t print $50 billion per month of new money and not ultimately impact the value of the dollar, and in the long-run the cost of capital. The Fed is printing up $50 billion of new money each month under QE3. In addition to the copious liquidity that the Federal Reserve has put in place, the global recession and the European community’s banking crisis has aided in keeping U.S. rates abnormally low. Each global economic issue in the past four years has seen a flight to quality in which investors purchased U.S. Treasury bills, bonds and notes, resulting in all-time record low interest rates. 2012 saw the one-month Treasury yield a sizzling ZERO percent December 28th (no kidding). So there is really no place to go but up. And that means that the cost of everything will rise also.
  3. Commercial real estate and transitional land remains, for the second year in a row in 2013, as one of the top return performers in the investment community. Commercial real estate held its own on 2012, and is staged to perform even better in 2013 given no new construction since 2006, rising rents from increased demand, and nil bond yields.
  4. The economy will not return to a traditional trajectory of recovery until small business knows what the new rules are, and that these rules do not force them (small business) to downsize. The Small Business Administration states that small business was responsible for two-thirds of all new jobs created from 1998 through 2009. While the tax-deal struck in the Senate and House clarifies the tax rules, it does so with new costs for almost all small business in coming years. And that is not good.
  5. Several state governments are headed to guaranteed catastrophic financial failure, and, in my opinion, the rest of the country should not be required to bail them out. I’m not talking about the incidence of events such as hurricanes, earthquakes or such tragedies, but rather running budgets, programs and entitlements that current and future revenue flows cannot support. A major national issue in 2013 or 2014 will be the debate in Washington, DC, to bail out bankrupt states that have failed to trim spending and governmental programs. I vote no on bailing them out.
  6. Washington, D.C. (and we are talking about the President, the Senate and the House of Representatives), continues to be run mostly by politicians rather than leaders. This group as a whole (but not all) are more concerned with partisan positioning and repaying campaign contributors than tough decisions to grow the economy and stem the massive spending hemorrhage in the Federal deficit. If you keep partying like there is no tomorrow, I guaranty you will wake up with a colossal hangover and regret your previous actions.

Tepid Economic Recovery and Small Business

The pace of economic recovery is anemic at best, when focused on job creation. Despite an unprecedented $880 billion stimulus package in 2009 (which may have only stimulated $880 billion plus in new Federal debt), we are in the slowest recovery trajectory in 40 years. Why? Because almost nothing that was done in the stimulus package that benefited and encouraged small business to expand. Just the opposite has taken place. Between ObamaCare and the CFPB, small business faced increased costs and regulations.

It’s Just Not the Federal Government Spending Too Much: Many States Are Walking a Perilous Path

Forbes Magazine detailed states that had as many or more people dependent on government (either working for the government, or receiving government pensions or welfare payments) than were employed in the private sector.

Forbes deemed these eleven as “death spiral states.” To make the list, there had to be more takers than makers, and the state had to rank in the bottom half of the list of Conning & Company, a money manager known to assess risk in insurance portfolios on municipal and state government bonds.

In California, for example, for every 100 private sector employees (makers) there are 139 government workers, government retirees or welfare recipients (takers). While I have no problem with Californians, allowing government workers to retire at younger ages than other states, to have more governmental services (and greater numbers of governmental employees) and to have a broader array of welfare services, I do have a problem with them asking me to pay for those services and privileges. You voted for it in your state so you pay for it is my motto.

Forbes went to the extent of recommending that a person forgo buying a home in these states, given future tax obligations in some form that will be required to fund future expenditures.

The eleven states included New Mexico (with 153 takers per 100 makers), California, New York, Illinois, Ohio, Hawaii, Mississippi, Alabama, South Carolina, Maine and Kentucky.

Prognosis

So will 2013 fare better than 2012? I think so—despite what we are doing as a country. Record increases in the money supply says both individuals and business America are staged to spend those dollars and stimulate the economy. When they do so is a function of when we all know what the rules will be from Washington, DC.

Get with it Washington, DC.

Ted

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