Terminological Inexactitudes

"As the independent Office for Budget Responsibility has made clear, growth has been depressed by the financial crisis, the problems in the Eurozone, and a 60 per cent rise in oil prices between August 2010 and April 2011. They are absolutely clear that the deficit reduction plan is not responsible. In fact, quite the opposite." 

Oh dear, oh dear, oh dear. Surely someone should have checked the facts before putting that in Mr Cam's speech.

Because now the head of the Office for Budget Responsibility has quite rightly pointed out to the entire world that Mr Cam is seriously misquoting him. Far from saying that the deficit reduction plan is not to blame for weak growth, the OBR actually says that the plan probably cut GDP by 1.4% in 2011-12. Either the PM didn't bother to look at what the OBR had said, or... well... he's tried to get away with an inexactitude.

Of course, that figure of 1.4% is only an estimate, and as the OBR explains, different left and right handed economists have a wide range of opinions as to what the true figure might be. But the key point is that our PM should at least have checked the OBR's view before quoting them as a reference.

In reality, while the financial crisis, the Eurozone crisis, and the oil price hike have severely dented GDP, not many doubt that the deficit reduction plan has also had a depressing effect: spending cuts and tax increases tend to do that. As always with fiscal retrenchment, it's a question of short-term pain against the long-term gain of lower deficits and - in the case of spending cuts - lower taxes.

Ironically, the OBR estimates do support another point that Mr C might have made. And that is that it was Labour's deficit reduction plan - the plan Mr C inherited - that was responsible for the bulk of that 1.4% GDP reduction. Because as the OBR notes:

"Discretionary consolidation between 2009-10 and 2011-12 was planned to be 2.8 per cent of GDP at the time of Labour’s last Budget. The Coalition increased this to 3.7 per cent of GDP in June 2010."

In plain English: 75% of the deficit reduction measures through to 2011-12 were Labour rather than Coalition decisions. Despite what Balls and Millie might inexactitudinally suggest, most of the deficit reduction plan was down to them rather than the evil Tories.

Which just goes to show how very timid Mr Cam has been.

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Walking Out With Tina

"One of the best ways to help hard working families is to cut their taxes. As a low tax conservative I absolutely believe in doing this. That is why we’re already cutting fuel duty and freezing council tax. And from this April, we are delivering the biggest ever increase in the income tax threshold... 

Now, of course, there is a case for going even further – and making even more tax cuts. But the key point is this: you have to be able to fund them... Margaret Thatcher understood that a tax cut paid for by borrowed money is no tax cut at all… …when she said: ‘I’ve not been prepared, ever, to go on with tax reductions if it meant unsound finance’  

Getting taxes down to help hard working people can only be done by taking tough decisions on spending. That is what we are doing in our plan. And this month’s Budget will be about sticking to the course. Because there is no alternative that will secure our country’s future."

Well, she's been away quite a while, but we all remember Tina as a no-nonsense kind of a gal, and if Mr Cam is now walking out with her that's excellent news.

The public finances must add up, and to get sustainably low taxes, public spending needs to be a lot lower than it's been over the last decade. Tina loves that kind of talk. But she'll also be asking how the economy's supposed to get motoring without some serious tax cuts. Monetary policy could hardly be looser, with the currency down 20% over the last five years, but it hasn't done the trick. We surely need more tax cuts.

OK, we'll come back another day to the issue of whether unfunded tax cuts can pay for themselves. At least Tina will agree with Mr Cam that he needs to take those tough decisions on spending. The problem though, is that he hasn't taken enough of them.

As we blogged a few days ago, the cuts so far announced have done little more than scratch the surface of Labour's huge spending surge. Spending continues to grow year by year, and government debt continues to mount, leaving serious tax cuts as jam tomorrow. Even when we adjust for inflation, total spending is only planned to fall by 5% from the level inherited by the Coalition. A big chunk of that reflects the fall in emergency capital spending, and for the rest, much of the detail has yet to be agreed (hence the public arguments between cabinet "colleagues").

Yes, spending cuts are fiendishly difficult to make: wherever the cut falls, somebody will suffer, and sufferers rarely accept their fate quietly. But that's where Tina comes in. Had she been around last year, she'd have insisted on a continued and more effective public pay freeze, and maybe imposed an across-the-board freeze on benefits as well. She'd probably have abolished universal benefits, replacing them with means-tested help for the poorest only. She'd certainly have cut foreign aid, focusing it much more on humanitarian relief rather than all those development projects of dubious use. And then... and then... well, and then what? Cut the NHS budget? Oooh, perhaps not. Cut schools spending? Hmmm... Cut the police and the military even more? Ahhhh....

Difficult, even for Tina. And last time she was around back in the 80s, she didn't get it right.

What happened back then was that our key public services like health and education were starved of funds for over a decade. Public spending wasn't actually cut overall, but budgets failed to keep pace with the growth of demand, most obviously in the health service. The NHS fell ever further behind its European counterparts in the acquisition of new drugs and technology, and the condition of its hospitals. Many tens of thousands of us died from conditions that should have been treatable. Balancing the fiscal books resulted in public services that failed to deliver what we wanted.

Which is why this time Tina must think more radically than just cutting or even starving. She needs to think about restructuring the public sector and the way our public services are delivered.

Because as a recent book has argued, the public sector currently wastes many tens of billions of our cash. If we could make inroads into that, we'd stand a realistic chance of balancing the books without crippling our public services or leaving the poor to starve in the gutter. But to do so we're going to have to take some really tough decisions, decisions that will change the entire public sector landscape. And here are the four key-words for Tina to memorise (in ascending order of ugliness):

• Downsize - small governments are the most efficient
• Decentralise - decentralised governments work best
• Demonopolise - break up public sector monopolies in health and education
• Deuniversalise - confine welfare to the poor

We hope Tina is reading this, and we'll be giving her more detail on each of them in blogs to come.

PS Last night the TaxPayers' Alliance hosted a launch event for Burning Our Money, the book. It was great to meet some BOM readers, and I hope that those who bought copies of the book find it interesting and useful. Here's a pic of some grey haired old bloke autographing a copy (a sure-fire collector's item):

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Speaker Boehner Wants Budget Deals 'Out In The Open'

House Speaker John Boehner told me on Wednesday that a long-term deal on entitlements is possible, and also that there's no good reason for Team Obama to shut down the White House tour.  As the mandatory budget cuts continue to take effect, Boehner said he believes the American people still know that Washington primarily has a spending problem.

The speaker insisted that the president still doesn't understand that spending is the real issue, although he was more optimistic about Obama's offers to reform entitlements.  He also said he believes talk of limiting Social Security benefit increases and "means testing" Medicare to disqualify the wealthiest senior is for real, and that these items could be a basis for a grand bargain with the president.

But the Republican speaker made it clear that he wants to move budget negotiations out of the back rooms and in front of the broader congress and the American people.

"The top-down deals haven't worked out too well," he said during the exclusive Kudlow Report interview, adding that the process needs to be "more out in the open."  And while he noted that he gets along well with Obama on a personal level, he said the budget process shouldn't be about their relationship anymore.

The speaker also stepped into the controversy now swirling in Washington over the decision to shut down White House tours because of the sequester cuts.  Boehner said, "The president is trying to make it tough on members of Congress.  It's just silly.  I want to know who is being laid off at the White House.  The Capitol is open for tours.   We've been planning for this for months."

Boehner closed the interview by telling me that he's "still on a mission," and that he intends to stick around as speaker for a while.  He also me announced that he is launching a new comment feature on www.speaker.gov that offers average Americans a chance to weight in on government spending.

View our two-part interview below:

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More One-on-One with Speaker Boehner

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One-on-One with Speaker John Boehner

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ADP Points To Strong Job Gains

The Dow hit an all-time high yesterday, although the S&P 500 remains about 35 points away and the Nasdaq is probably years away.  But the headlines sparked some interest, and I got questions from some friends who haven't asked about the markets in 10 years, lol.

It remains to be seen if folks continue to return to the market with all that cash that has been sitting on the sidelines.  Some strategists think that when recent bond fund purchases start to show losses on investor statements that the lure of equities will pull them in.  But bond yields are going to have to start moving up for that to happen, and the economy likely needs to improve more to support higher yields.

This morning the ADP Employment report showed the economy added 198,000 jobs in February, which was above expectations.  Sometimes a strong ADP report leads to a strong govt. payrolls report on Friday, but not always.  And to bring the unemployment rate down we probably need to see monthly jobs numbers in excess of +200k.

Asian markets were higher across the board overnight following the record setting Dow close.  Japan led the way with a 2.1% gain.  In Australia, the economy grew +0.6% in Q4, in-line with expectations.

European markets are also higher this morning.  The Eurozone Q4 GDP figure was reported at -0.6% as the country remains mired in a debt-ridden weak growth environment.  That could cause leaders to rethink some of the austerity measures that continue to choke off any prospect for growth.  An IMF official said Spain must remain on track for its reforms, but the country's budget minister said no new taxes will be taking place.

The dollar is higher today, and most commodities are lower.  Oil prices are down to $89.65, copper prices are lower, as are ag prices.  Gold and silver are bucking the weakness, with gold only slightly higher to $1580.

The 10-year yield is rising again, and is back above its 50-day average to 1.92%.  And the VIX is up 1.5% but still below the 15 level near 13.65.

Trading comment: The Dow headlines about making a new record high is likely to put a little pressure on portfolio managers who remain underinvested.  Those folks likely have to continue to chase stocks higher to keep up.  But the disciplined investor can wait for good buying opportunities, which always come.  The put/call ratio has been very high the last 2 days, despite the positive action in the market.  That leads us to believe the many investors remain skeptical of this advance and that keeps the 'wall of worry' high-- which from a contrarian perspective is a good thing.

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Break Out The Party Hats

Although there has been plenty of buildup in recent weeks, this morning the Dow Jones reached a new record high.  I expect the media to really make a big deal out of this, so expect to see it in the headlines everywhere.

CNBC reported that just 5 Dow stocks accounted for nearly 1/3 of its rise back to new highs.  Most investors prefer to look at the S&P 500, which is still 35 points from its all-time high, but it too looks like it will get there in the near future.

While I joke about breaking out the party hats, it is a major achievement and something that few people would have bet on several years ago in early 2009 when most folks wanted to give up on stocks for good.  It just goes to show you that the fear and greed cycle is alive and well.  While the news and circumstances may change from generation to generation, investor psychology does not.  Our guess is that we are still far away from a peak in the greed cycle.  Most folks are still shaking off the cobwebs from the last bear market and weary about getting aggressive in stocks.

In economic news, the February ISM Services index came in at 56.0, up from January's reading of 55.2.

In corporate news, Qualcomm (QCOM) announced a $5 billion share buyback.  But we have yet to hear anything from Apple (AAPL).  What is wrong with their Board of Directors?

Asian markets were higher across the board overnight, led by a 2.3% bounce in China.  China set a 7.5% growth target for 2013 which includes double-digit military spending increase.  The Reserve Bank of Australia held rates steady at 3.00%.

Europe's markets are also higher today, after most PMI services reports came in above expectations.  Spain was the only economy to miss consensus.  EU commissioner Rehn said that poor European economic growth may cause leaders to rethink current deadlines for deficit reductions.  That means we could start to hear talk of postponing austerity measures.  This could be a good thing, as the main focus for deficit reduction should be on economic growth measures.

The dollar is roughly flat today, and commodities are mostly higher.  Oil prices are up a bit near $90.41 and gold prices are higher to $1576.  Copper and silver prices are up slightly also.

The 10-year yield is bouncing a little back to 1.90%.  And the VIX has plunged back below the 15 level, down -5% today to 13.30 as the markets break out to new highs.

Trading comment: We have commented endlessly about the dip buyers who emerge on every pullback and the stair-step pattern of the market.  This recent mini-pullback lasted about 10 trading sessions, saw the SPX pullback fairly close to its 50-day support, and them move right back to new highs.  That has been the pattern for months.  At some point we will get a deeper correction, but it sure hasn't paid to sit on the sidelines and wait for said correction.  While many stocks are extended, fresh breakouts from consolidations remain attractive as the market stays in bull mode.

KAM Advisors has long positions in AAPL and QCOM

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