Ten Market Estimates and Predictions From 2012 - An Evaluation

Market estimates and predictions are always viewed with a degree of caution. Attempting to forecast the direction of shares, currencies and interest rates is very difficult to do, especially with any accuracy or consistency. However, some crystal ball gazing can be a necessary exercise for investment advisers and strategists, and it does at least allow us to focus our thoughts, consider various scenarios and evaluate risks and opportunities. Rather than rely too heavily on market predictions, we prefer to consider them as talking points that might encourage some insightful debate and thought.

On that note, let's recap and evaluate what we wrote a year ago regarding 2012.

1. Recession in Europe, while the US economy surprises us

Correct. Europe did fall back into recession despite most forecasters expecting at least some growth, while the US economy was much more resilient than many predicted as house prices stabilised and consumers began to spend again. Many of the worst problems in the United States over 2012 were political, rather than economic.

2. No break-up of the Eurozone in 2012

Correct. The Greek election was a bit of a debacle, but in the end the Eurozone stuck together and the European Central Bank resolved to do "whatever it takes" to keep things stable. For now, it's working.

3. No "hard landing" for China

Correct, but only half a point. China did avoid a hard landing (which would have had severe consequences for Australia and to a lesser extent, New Zealand) but we also said it would hit 8% growth. It looks to have just missed this hurdle, with actual growth for the year likely to be in the high sevens.

4. Shares have a positive year

Correct, but only half a point, because we weren't nearly optimistic enough. We picked the local market to deliver "at least 5%" and the US to rise 10%, but share investors have had an outstanding year with the NZX50 up 24.2% and the US rising 15.9%.

5. NZ Interest rates remain very low

Correct. A year ago the bank economists were, on average, expecting the Official Cash Rate (OCR) to hit 3.0% by the end of 2012, but it was unmoved all year at its current 2.5% as the recovery remained very sluggish.

6. The NZ dollar rises against our major trading partners

Correct. The NZ dollar rose 6.6% against the US dollar as the Americans continued to undermine their currency with their money printing policies. It also rose against the British Pound, the Euro and the Australian dollar.

7. Fixed interest doesn't repeat its 2011 performance

Correct. Fixed interest was the star asset class of 2011, delivering a stunning 13.3% compared with NZ shares, which fell 1.0%. But in 2012, shares had their best year since 2004 rising almost 25%, while fixed interest delivered a reliable yet much less inspiring 6.2%.

8. Obama is re-elected US president

Correct. It was a tight race and Mitt Romney put up a good fight, but the eventual election result meant an unchanged US political landscape. Ironically, rather than the usual post-election optimism, markets saw the status quo outcome as a major negative. The expectation of further political gridlock and further decision-making stalemates drove the S&P500 down 5% in the days immediately following the election.

9. Mighty River Power might not be the only game in town, as legislative changes might enable Fonterra to introduce share trading allowing the public to invest

Correct. A final decision on Mighty River was deferred into 2013 and Fonterra did indeed come to market (in the form of the Fonterra Shareholders Fund), and what a stunning debut it was.

10. Inflation falls back to low levels

Correct. Official inflation was just 0.8% - below the Reserve Bank's target band of 1-3% and unlikely to spark any interest rate rises in a hurry.

It's Important to Be Aware of Different Kinds of Tax Saving Investments

It goes without saying that proper tax planning is an essential constituent of personal finance. However, before you invest somewhere and see if you can avail tax benefits or not, it's important that you are aware of different forms of tax saving investments. Though they come under various categories, but the ones under Sec 80C are one of the most prominent ones; thus, it's important that you are aware of them so that you can plan and invest wisely.

To start with, life insurance policies are one of the largely chosen ways for savings. These policies for a very long time have been measured as a tax discount means. However, many times because of ignorance and lack of knowledge, the buyers buy the wrong coverage and policy and stay unsatisfied. Remember, a life insurance policy is gainful when you are on a lookout for ways to offer a monetary shield to your family in case of any mishap or unfortunate incident. What sum of insurance, you should have will depend on various factors; like your takings, expenditure, responsibilities and more. Remember that the tax benefit is the inbuilt benefit that will come with this product. So, think about this only after thoroughly knowing your needs and requirements.

Alternatively, you can also go for the Public Provident Benefit (PPF) or a Fixed Deposit (FD). The former is extremely favourable small savings scheme available to investors. The flexibility in contributions according to ones needs and requirement makes it a perfect choice for lasting funds and gaining excise benefit year on year. FD, on the other hand, for five years falls under Sec 80C tax benefit. Though generally, it is a feasible option for investors when last minute decisions have to be taken, yet the taxability of interest lowers the net yield. However, it is a good choice in current scenario especially for individuals in lower tax group.

This is not all; you can also make a tax saving investment, under Sec 80D. Under this section, one can benefit up to Rs 15000 for self and family, at the same time as added Rs 20000 is accessible for parents in senior citizen group on premium paid for a health insurance scheme. However, just like life insurance policy, remember that it should not be measured only for fiscal advantages. A health insurance is there to offer you the benefits in case of emergencies. Do a proper research and then, buy the right plan, which matches your requirement.

The Spending Sequester Will Grow the Private Economy

Today’s report of a 0.1 percent GDP decline for the fourth quarter came as a surprise to most forecasters. But it actually masks considerable strength in the private economy. Namely, housing investment in the fourth quarter jumped 15.3 percent annually, business equipment and software spiked 12.4 percent, and real private final sales rose 2.6 percent. All in, the domestic private sector of the economy increased 3.4 percent annually -- a very respectable gain.

And here’s one for the record books: Working ahead of year-end tax hikes, individuals shifted so much money to the fourth quarter at the 35 percent top rate that personal income grew by 7.9 percent annually -- a huge number. And there’s more: In order to beat the tax man, dividend income rose 85.2 percent annually. You think tax incentives don’t matter? Guess again.

Now, all this private-sector strength occurred despite the fact that government spending -- namely military spending -- dropped 6.6 percent. Inventories also lost ground and the trade deficit widened.

But here’s a key point: Military spending has now fallen virtually to its lower sequester-spending-cut baseline. It did so in one quarter by about $40 billion. So the brunt of the impact over the coming years has already been felt. (Normally, as of recent years, military spending has been virtually flat.)

Which leads me to another key point: Even with the fourth-quarter contraction, the latest GDP report shows that falling government spending can coexist with rising private economic activity. This is an important point in terms of the upcoming spending sequester. Lower federal spending, limited government, and a smaller spending-to-GDP ratio will be good for growth. The military spending plunge will not likely be repeated. But by keeping resources in private hands, rather than transferring them to the inefficient government sector, the spending sequester is actually pro-growth.

Big-government Keynesians think big spending provides big growth. They are wrong. This has been a 2 percent recovery -- the worst in modern times -- dating back to 1947. So let’s try something different. Let’s shrink government. Let’s let the private sector breathe and generate entrepreneurship and risk-taking.

Spending is the true tax measure of the economy, according to Milton Friedman, Friedrich Hayek, and others. Even a modest sequester spending cut of maybe $60 billion in 2013, and perhaps more than $1 trillion over ten years (most of which will come from a slower spending growth rate, not real reductions), will be the best thing to inspire business and market confidence as well as international credibility. And it maybe even shave a point or two off the spending share of GDP.

On March 1 the spending sequester is supposed to kick in by law. If Congress wants to help the U.S. economy, the best thing it can do right now is implement this sequester. Then it can round out an even larger growth package, including large- and small-business tax reform and adjustments to stop entitlements from going bankrupt.

One-on-One with Senator Ted Cruz

Last week on "The Kudlow Report", I asked Republican Senator Ted Cruz if he'd go with a government shutdown if it came to it on the debt-ceiling debate.  His answer: "I think we have to be prepared to go so far as to shut the government down -- if we don't get some serious policies to stop the out-of-control spending, to tackle the debt, and to get economic growth."

It was a bold statement.  Watch the full video here:

No Cliff Calamity: That's What Stocks Are Correctly Predicting

Despite all the media hullabaloo about the fiscal cliff and a potential recession if none of the Bush tax cuts are extended, stock markets have behaved calmly throughout this whole period. In fact, as of this writing today, the Dow is up 100 points.

I’m gonna guess that stocks, in their wisdom, are correctly sniffing that there will be no calamitous falling off the cliff. By that I mean there will be no $500 billion tax hike, which would be an economy killer.

Instead, after speaking with prominent Republican House and Senate members, I have come to believe the following: The GOP knows that Obama has the upper hand in this post-election battle. Therefore, they are preparing a strategic retreat.

Republicans don’t want to be the party of rich people and let Obama maintain his hold on the middle class. Republicans also don’t want to be the party of recession. So if no comprehensive deal is reached by President Obama and Speaker John Boehner, Republicans will not block an extension of the so-called middle-class tax cuts, which are roughly three quarters of the total.

It’s hard to know how this story will work itself out. There may be deals on upper-end tax rates, say 37 percent instead of 39.6 percent. And maybe even some lower tax penalties on capital gains and dividends.

Ideally, the GOP can get solid promises on spending cuts and entitlement reforms in return for a tax package. That tax package may include a dollar limit for tax deductions along with the rise in upper-end tax rates. Entitlement reform is also on the table. And so is a roughly $60 billion 2013 spending cut, which carries over from the across-the-board sequester. That is still possible.

But what is not possible is that House Republicans give up their constitutional prerogative to set the debt ceiling. That is their biggest point of leverage. And that leverage will carry over into 2013 as lawmakers once again attempt an across-the-board effort for pro-growth tax reform (flatter rates, broadening the base), serious structural entitlement reform, and more discretionary spending cuts. This will be the battle royale of next year.

As I said, no one knows how all this is going to play out in the next two weeks. But from the standpoint of the economy and the stock market, a worst-case tax-hike scenario that would sink GDP is not likely to happen.

There will be a deal to extend most of the tax cuts. And while higher tax rates on successful earners, small-business owners, and investors are most definitely not pro-growth, at least the across-the-board tax-hike calamity will be avoided.

Richard Fisher: Fed Won't Catch Markets If US Falls Off "Cliff"

Senator Kyl Sees Higher Revenues Without a Tax Hike

A federal budget deal to avoid the fiscal cliff can be achieved without

raising tax rates, Senate Minority Whip Jon Kyl said Friday on the Kudlow

Report.

“Tax revenues can be generated by two ways other than raising tax rates,” he said. “One is to eliminate some of the deductions, credits, exemptions, special provisions in the code that end up producing more revenue but without affecting the rates. And the other is through economic growth.”

The senator from Arizona said he thought it likely a deal could be struck to avoid the so-called “fiscal cliff,” a deadline by which the lack of a federal budget would result in the expiration of the Bush tax cuts and trigger automatic spending cuts.

Kyl sees additional revenues as the key.

“If we can focus, not on tax rates, but to give the president something that he

wants, more tax revenues, as I said, there are ways to get more tax

revenues,” he said. “Either through and/or producing more wealth as a

country, thus resulting in more taxes paid to the government.”

The Republican senator also took issue with the recommendations of the

special committee co-chaired by former Sen. Alan Simpson, R-Wyo., and

former Clinton White House Chief of Staff Erskine Bowles.

“Simpson-Bowles is not a good template here because it sets up a contest

between lowering marginal tax rates and raising the business taxes, that is to

say, dividends, capital gains and the estate tax,” he said. “Simpson-Bowles

in effect says, you can have lower rates on one side or another, but not both.

That’s not good.”