Two Economic Developments Every Investor Needs to Be Aware Of
Last week I outlined the reason why we are very likely going over the fiscal cliff: there are little if any political incentives for the GOP or Dems to fix the problem; the best option politically is to let us go over the cliff and then offer targeted tax breaks in late 2013 early 2014 as part of their 2014 Congressional campaigns.
With that in mind, corporations are now rushing out special dividends to shareholders in an effort to beat the coming tax hikes on dividends.
Between Nov. 1 and Dec. 5, 349 companies moved up their dividends or paid special dividends, according to Silverblatt. That is higher than the 314 irregular dividends paid last year in all of November and December. Silverblatt expects the pace of early dividends to pick up if Washington keeps dawdling.
Many companies go beyond moving up ordinary payments. They are declaring special, one-time dividends to take advantage of the lower tax rate while it lasts.
This is a serious red flag for the US economy’s future: all of the capital being paid out to shareholders will not be going into corporate expansions or hiring. This, when taken along with the recent rush of capital into savings accounts ($150 billion was shifted into savings accounts following Obama’s re-election), indicates that big money is either going into hibernation or being paid out to shareholders.
In simple terms: none of these funds will be used to grow the US economy or create jobs. Which means the US economy will be taking an even sharper nose-dive than expected in 2013.
On the other side of the pond, the EU as a whole is in recession. However, recent data coming from Germany indicates things are going to be getting significantly worse.
Month over month, German industrial production fell 2.6% in October. It fell 1.3% the month before. This contraction has resulted in the Bundesbank lowering its 2013 GDP growth projection to just 0.4%.
The entire EU bailout process has been based on the notion that Germany will write the check to fund various bailouts/ interventions. If Germany enters a recession then politically it will be much harder for German politicians to push for additional aid to the rest of the EU.
Remember, Chancellor Angela Merkel is up for re-election next year. So she will be turning her attention increasingly towards her campaign. And running on the idea of more bailouts when the German economy is contracting is political suicide.
Thus, we have something of a capital freeze occurring in the US at the very same time that the primary pillar of EU stability (Germany) will very likely begin to pull back from providing additional aid (case in point, Greece is still waiting on receiving proposed aid from six months ago).
All of these items point towards what will be a particularly ugly 2013.
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