Heres what we are reading.... Tuesday, October 289, 2014 Today’s Deficit Is Not the Problem The federal deficit for the 2014 fiscal year dropped to 2.8% of GDP, significantly below the 10% peak during the Great Recession. According to the Congressional Budget Office (CBO) projections, the federal deficit will remain below 3% of GDP through 2018. The CBO deficit forecast assumes that spending caps that were enacted in the Budget Control Act of 2011 will remain in place through 2021. If the spending caps hold, Social Security, healthcare and debt interest payments will become a much larger percentage of overall government spending, which will reduce outlays on government programs that are investments in the future, mainly education, research and development, and infrastructure. If the government spending caps do not hold and spending grows at the same pace as the overall economy without any tax increases or cuts in benefit programs, the federal deficit could increase ahead of baseline projections and reach 5% of GDP by 2021. As stated in the article, “today’s deficit is not the problem. Tomorrow’s looks bigger than the comforting projections suggest.” Brazil Vote Highlights a Rift Linked to Economics Brazilian voters re-elected Dilma Rousseff as president on Sunday, supporting a leader who has helped reduce poverty and kept unemployment low over a centrist challenger who criticized her government over a simmering bribery scandal and a sluggish economy. Ms. Rousseff took 51.64%, against 48.36 % for her rival, Aécio Neves, the smallest margin of victory in any presidential election since democracy was re-established in the 1980s. The election results highlighted widespread social and geographic divisions within the country. Ms. Rousseff won easily in the relatively poor northeast where recipients of social welfare programs broadly backed the incumbent, while Mr. Neves comfortably won in São Paulo, Brazil’s richest and most populous state. Brazil’s main stock index fell by 3.7% following the election, continuing a steep two-month decline which was largely attributable to the likely prospect of a Rousseff re-election. The World’s Biggest Economic Problem The Economist outlines the growing dangers of Eurozone deflation, which has played a major role in recent market volatility. The article takes the position that drastic actions are needed from the European Central Bank and political leaders in order to mitigate the risk of the region falling into a prolonged period of falling prices, similar to what Japan has experienced in the past two decades. However, there does not seem to be much appetite for drastic action from either monetary or fiscal authorities and a true crisis may be required before an aggressive policy response is enacted. The article is sobering and pessimistic, but does a good job of presenting some of the risks in Europe that may continue to create market volatility for the foreseeable future. ECB Stress Tests Seen as Bolstering Confidence in Banks Last week, the European Central Bank (ECB) released results of its recent stress tests of its banking system. This examination was also seen as a test of the ECB’s credibility. Although the results showed that 13 banks failed the test and the region needed an additional $31 billion to bolster their capital bases, no large banks failed. Other reports have shown that since the European sovereign debt crisis peaked, European banks have raised over €200 billion of capital to shore up their finances and are in better shape today to deal with a slowdown in the Eurozone economy. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Nothing in these materials shall be construed as offering or disseminating specific investment, tax, or legal advice to any individual. Information contained herein shall not constitute an offer to sell or a solicitation of an offer to buy any securities listed herein. Past performance is not a guarantee of future results. 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Posted on: Tue, 28 Oct 2014 19:29:26 +0000
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