eFocus @ Legacy
Author: Paul Kasriel, Senior Economic
and Investment Advisor
America Has Faced The Unknown Since 1776
So wrote Warren Buffett in his March 1, 2013 letter to Berkshire
Hathaway Inc. stockholders. In the phrase before this quote, Mr.
Buffett wrote: "Of course, the immediate future is uncertain…" And
after this quote, he wrote: "It's just that sometimes people focus
on the myriad of uncertainties that always exist while at other
times they ignore them (usually because the recent past has been
uneventful)." I bring this up because ever since early-fall 2012,
there has been a Greek chorus of economists appearing in the
mainstream media warning us about various uncertainties from the
fiscal cliffs of Washington D.C. to the banking whirlpools of
Cyprus. These uncertainties were supposed to freeze the purchasing
decisions of businesses and households alike, threatening to plunge
the U.S. economy back into recession.
Presumably because of this uncertainty, economists were
relatively pessimistic about the U.S. economy's growth prospects
for the first quarter of 2013. Back in October 2012, the consensus
forecast for real GDP growth in the first quarter of 2013 was 1.7%.
Now, it is 2.9%-not spectacular but a lot better than the previous
quarter's growth of 0.4%. The U.S. data that have been released for
the first quarter in 2013 so far suggest that the only sector whose
purchasing decisions have been "frozen" is that of the government.
Growth in consumer spending appears to have accelerated and the
strong growth in business capital spending that occurred at the end
of 2012 appears to have continued in the first quarter of 2013.
Uncertainty will always be with us. Something else that is now
with us, but won't always be, is the rapid expansion in the Federal
Reserve's balance sheet. Back in the fall of 2012, the Fed
announced that it intended to expand its balance sheet by
approximately $85 billion per month, which works out to $1.2
trillion per year. What is different about this round of Fed credit
creation is that, in contrast to previous rounds, the private
banking system also is creating credit. Historically, an
acceleration in the sum of Fed and bank credit has been associated
with an acceleration in domestic spending.
So, the uncertainty investors should be most concerned about is
how the Fed manages its balance sheet going forward. Will the Fed
terminate the expansion of its balance sheet too early or too late?
Right now, it appears to be managing its balance sheet "just right"
for investors in risk assets and for economic growth, which is
trumping all the other uncertainties, real or imagined, that the
talking heads keep warning you about in the mainstream media. I
don't know about you, but I think uncertainty is the last refuge of
economist scoundrels who don't have a clue about what drives the
cyclical behavior of the economy and asset markets.