"In the end, the fiscal cliff will go down in the history books as some laughable combination of Y2K, the end of the Mayan calendar, a Harold Camping video, and a few pages from a Nostradamus book." ~ David Zervos
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
From: DAVID ZERVOS (JEFFERIES & CO., INC) [mailto:firstname.lastname@example.org]
Sent: Wednesday, January 02, 2013 8:45 AM
To: John Broussard
Subject: Houston, we have Cliftoff!
In the last 6 months I have tried to spend as little time as possible discussing the fiscal cliff. It was always a farfetched notion that some static, partial equilibrium analysis of a $600b hit to the US economy was going to be relevant. But the markets love a good Armageddon story; and a 3.6% hit to 2013 GDP provided endless entertainment for those who need to constantly be adding or cutting positions.
In the end, the fiscal cliff will go down in the history books as some laughable combination of Y2K, the end of the Mayan calendar, a Harold Camping video, and a few pages from a Nostradamus book. The idea that a move in top marginal tax rates by 5 percent would send the economy into a tailspin was ludicrous. In the last century, across numerous developed nations, we have seen plenty of strong growth with top marginal income tax rates greater than 39.4 percent. And the academic economic literature has never been able to accurately document strong correlations between top marginal income tax rates and long run growth. So if a bunch of levered traders want to jump on risk assets, and try to push them lower in illiquid year end trading conditions on some faulty set of growth/tax correlation theories, then so be it! They can drive it for a few days, and a few percent, but the whipsaw will be extreme. The reality is that the fiscal cliff was just foundationless noise in the midst of a massive reflationary trend higher for risk assets!
The good news now is that it is time for "cliftoff" – the process of breaking away from cliff drivel and moving towards a focus on the reflationary liftoff from uber-easy global monetary policy! The printers are in the driver's seat and real assets (or as I like to call them, non-printable assets) are set to rip. The market has gotten itself in lather about weak growth, the new normal, fiscal drags and some faulty twist on Armageddon. The reality is that ALL major central banks are going to drive global NOMINAL growth much higher in 2013. In turn, NOMINAL asset prices for REAL assets are headed for "cliftoff". Bad positions, incorrect correlation assumptions and a failure to focus on nominal growth will combine to generate a chase for risk assets. It will be a beautiful start to 2013 for those that did not fall for the fiscal cliff nonsense. Good luck trading!