After the holiday break we return to find the JSE at record high levels (again!). So what has happened… or rather what has not happened?
In our November 23 Blog entry “23 November 2012 – Where do we stand?” we highlighted some of the risks that the markets face in the short to medium term. Chief among our noted risks was the looming US Fiscal Cliff which would take effect on the first of January 2013. As we have passed this date and the markets have reached their stellar levels we can assume that the situation has been resolved and the Democrats and Republicans have finally agreed on the policy issues facing the country and have found a way to avoid the looming debt ceiling being reached (once again!)… unfortunately not.
What has in fact happened is that is that the issue has been postponed. President Obama has signed into law the “American Taxpayer Relief Act of 2012”. This Act raises taxes on those households earning above $450 000 per year while also delaying any decisions regarding the spending cuts that would have been imposed, had the Fiscal Cliff run its course. Thus D-day for the Fiscal has not been entirely averted but has been postponed for the next two months to give politicians and legislators time to reach some form of compromise.
In the meantime the debt ceiling is fast approaching and the focus will remain on the US to see whether the situation can be dealt with.
While we are pleased that the world economy has not had to deal with the potential shock of the US Fiscal Cliff we are apprehensive regarding the future growth prospects for the US. The deficit will have to be reigned in and this will inevitably involve a combination of the following:
Increase revenues via increased tax collections – this could stem from higher tax rates or from increased revenues due to economic growth.
Decrease expenditures – the question of where to implement spending cuts will be a contentious political issue. Each party will be aiming to minimise the effects of spending cuts on their voter base.
We will keep a close eye as events unfold in the US and keep you informed.
