Between the Lines

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Here’s what we’re reading… Tuesday, May 15, 2012

As European Austerity Ends, So Could the Euro
Recent elections across Europe show that voters have grown weary of austerity measures. Many believe that Greece would be better off leaving the euro area, but the same logic may also apply to many more nations. This leads to the fundamental questions of whether the euro currency can survive and what measures are needed for its long-term sustainability.

With European-level fiscal union highly unlikely, the author of the attached article argues that the European Central Bank will continue to loosen monetary policy and that resulting higher inflation rates will provide an escape hatch. However, these actions will lead to lowered confidence, a weaker currency, and higher interest rates, all of which will exert more stress on the viability of the euro.

Is the Fiscal Cliff Just a Myth?
An important issue that will likely dominate headlines in the second half of the year is the so-called “fiscal cliff” set to hit in January 2013 as a combination of expiring tax cuts and automatic spending reductions. In this editorial, Charles Lane of The Washington Post presents the optimistic case that the ultimate result will likely be relatively minor changes to tax-and-spending policy.

In Lane’s view, the CBO’s estimate that the fiscal cliff will suddenly subtract $388 billion in fiscal 2013 is likely to be overstated by at least $255 billion, or 66 percent. While concerns over this issue are likely to weigh on the market intermittently for the next several quarters, this article provides some evidence that the ultimate result could be less severe than currently expected, which would increase the odds for a second half of the year market rally.

Good News on the Labor Front
While the unemployment rate remains at an unhealthy 8 percent, Marketwatch’s chief economist Irwin Kellner argues that there are some encouraging signs developing. Employers have reported that more job openings are available, and at the same time more employees are quitting, which is an indication of confidence in finding a better opportunity elsewhere. Furthermore, the number of people competing for each job opening has also declined. Finally, small businesses’ optimism and hiring plans are up, which is especially encouraging since small businesses are responsible for most new jobs. If these data points turn into longer-term trends, the labor picture should continue to improve.

Homebuilder Confidence in U.S. Climbs to Five-Year High
U.S. homebuilder confidence has reached its highest level since May 2007, according to this Bloomberg article. The improved outlook on housing construction is the result of higher interest in new home purchases as housing affordability has improved. Stabilization of housing prices coupled with increased bank lending and extremely attractive mortgage rates have made housing more attractive to potential buyers.

“Banks are showing increasing willingness to lend to consumers, which should bode positively for the mortgage market. In turn, this would help shift the housing recovery into a higher gear,” said Deutsche Bank Chief Economist Joseph LaVorgna.

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Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
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