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With so much pessimism heading into 2012, we thought it would be prudent to discuss the possibility of positive surprises.
That’s the festive spirit of the economists at Bank of America Merrill Lynch, writing in a report released on Tuesday.
Here's their list of optimistic scenarios ordered according to the surprises which would have the biggest impact — though, unfortunately as it turns out, these are also the ones which they think are the least likely to happen.
In pole position:
Europe: policy to the rescue
While there is little to be done to combat the fiscal contraction, there are steps policymakers can take to stem the credit crunch, support confidence and financial markets. On the fiscal front, policymakers can make a swifter move to fiscal integration with a roadmap for centralizing budgetary decisions and prospects of a Eurobond. On the monetary side, the ECB could engage in QE "“ quantitative easing in the form of buying sovereign bonds. Laurence Boone argues that this is possible provided the ECB does not target a particular sovereign. The ECB can defend QE by arguing that either deflation is a threat or that yield volatility disrupts the normal monetary policy transmission.
At least it shouldn’t be too hard for the ECB to argue that the monetary policy transmission is already borked, yield volatility or not.
It’s almost comical to imagine European politicians getting all decisive and taking concrete, aggressive steps. We picture Hank Paulson being flown in to give a Powerpoint presentation on what does, and does not, count as a bazooka.
Speaking of Americans though, here’s position two (emphasis ours):
Washington: decisive action
Even with a likely contentious election year, there are steps Congress can take to underpin confidence. Most immediately is to convert the two-month extension of the 2% payroll tax cut and unemployment insurance extensions into a full year bill. This would have to be done without damaging offsets, which means compromise between the Republicans and Democrats. …
Beyond the extension of payroll taxes and unemployment insurance, policymakers can make progress at reducing uncertainty heading into 2013. There are three time bombs at year end: across-the board tax hikes (Bush tax cuts expiring), across-the board discretionary spending cuts (due to the failure of the Super Committee) and the debt ceiling deadline in early 2013. If Congress can act preemptively, announcing a clear plan for the debt ceiling, it will boost business and consumer confidence. Reengaging in the discussion around longrun fiscal responsibility and bringing the Simpson-Bowles plan back into discussion would also be considerable progress.
While the preemptive part sounds conceivable for American politicians, agreement on policy may prove too challenging among all the mud-slinging. But wait, we’re meant to be trying to be optimistic, remember?
Construction boost
…the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, and the Treasury, are considering a plan to dispose of the government REOS (real estate owned properties) efficiently. This would likely take the form of bulk sales "“ selling foreclosed properties to investors who would renovate and rent them. We believe a plan could be announced in Q1 2012.
Such a plan, if large enough and implemented efficiently, will not only help bring a bottom in home prices, but it could also spur a quicker turnaround in single family construction. If foreclosed properties are sold to investors, they are not competing with new construction homes for primary homebuyers. This will create opportunities for single family construction.
In short, the overhang of foreclosed properties is holding back a recovery in home prices, particularly those of single-family homes. As such, builders aren’t constructing as much as they could be.
It’s worth noting again that these are positive outcomes that would take the BAML analysts by surprise. The team is actually expecting the Real Estate Owned (REO) asset disposal plan to come too late into 2012 and be too small to make a difference, at least for this year anyway.
And finally, here’s a last bit of cheer from the analysts related to how corporates might end up utilising their growing cash piles after all:
US virtuous cycle
Large corporations have excess cash, which means they have the ability to start investing if they deem it appropriate. If large businesses start deploying their cash by investing in labor in addition to capital, it could create a virtuous feedback in the economy. Greater hiring will increase income and create more job security, fueling consumer spending, which in turn feeds back into corporate revenues.
There is some early evidence of progress with the recent drop in jobless claims and improvement in consumer confidence. The drop in claims suggests stronger payroll growth and a drop in the unemployment rate.
The FT’s John Plender would call that wishful thinking. Plender, after all, is off the belief that if companies were to deploy their excess cash it would go anywhere but the labour market. As he noted this week:
That brings us to the most likely outlet for all that corporate cash. Much of it will go into share buy-backs, which are relatively painless for managers since, unlike dividends, they entail no continuing commitment to pay.
Oh, and that whole jobless claims, unemployment thing? Well, here’s the real, distinctly less festive, story from BAML illustrated by way of a couple of charts:
The above shows that the decrease in initial jobless claims hasn’t been met by an equivalent drop in the unemployment rate. Furthermore, as the second chart shows, there is now a big structural problem in the form of a large percentage of the workforce being long-term unemployed.
But yay, festive spirit!! Look, snow!!
(We may have added an angry bear…)
Related Links: Don't expect economic boost from cash-rich companies – FT Will the global economy finally recover in 2012? - The Curious Capitalist
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