Investment Contrarians

Many Wildcards That Could Throw a Wrench into the Economy

By for Investment Contrarians |

Wildcards That Could Throw a WrenchIn a week’s time, we will know who the next President of the United States will be; this will be critical, giving us an indication of where America is heading as far as policy and the impact on the economic recovery. The latest poll by CNN has the race to the White House in a dead heat, with Governor Mitt Romney slightly ahead at 48% of the votes and President Obama at 47%. In the key Ohio race, support for Obama has fallen from 52% on October 2 to the current 48%, according to CNN.

At this point, based on my unbiased view, I don’t really care who wins, but I do want something to be done about job creation, the $16.2 trillion in U.S. debt, and the pending “fiscal cliff.”

Whether you are a Democrat or a Republican, there is a commonality: we need to get the country fixed and get it going on the correct path to the economic recovery and jobs for all. The unemployment rate fell below eight percent in September, but the reading is well below the four percent level we saw in 2006 and 2007. The unemployment rate has improved from the recession high of 10.0% in October 2009, but needs to work its way lower for a sustained economic recovery.

What concerns me is the current lack of focus on the pending fiscal cliff on January 1, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, resulting in automatic spending cuts across the board and tax increases that will threaten the economic recovery.

Of course, there are assumptions about the budget and how to cut it while being conscious of not stalling the economic recovery at the same time. For instance, defense spending is expected to be reduced, but with a potential mess brewing in Syria and Iran, the emergence of another conflict involving America could push the country out of economic recovery.

Moreover, with the current change in China’s military leadership and the rising expenditures in the building of the next Asian superpower, there will be some hesitancy to cut military spending in America. The problem facing the U.S. is that the country’s massive debt hinders spending, while China is sitting on over $3.0 trillion in reserves, including a key portion in U.S. debt.

There is also the issue of the effectiveness of the third round of quantitative easing (QE3). The Federal Reserve is spending $40.0 billion a month to buy mortgage-backed securities and, in theory, to lower financing rates, helping to drive the economic recovery. This is the theory, but the current yield on the 10-year Treasury stands at 1.76% versus 1.84% prior to the establishment of QE3. Something isn’t working. And if Governor Romney wins the upcoming presidential election, there is speculation that he will dump Ben Bernanke and select who will lead America going forward, driving the economic recovery.

But do more changes mean better results?

The reality is that there are so many “what if” scenarios that could hamper the ability of the U.S.—and I haven’t even discussed the financial crisis in the eurozone.

On November 6, we will remove some of the market uncertainties.

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