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Sunday, February 12, 2012

Worst averted for 2012

Tony Paradiso

I’ve dragged my feet on offering an assessment for 2012 because gauging the severity of Europe’s impact has been daunting. I originally thought they would briefly flatline our economy, but with Europe winning the gold medal in the kick the can down the road competition, it appears that the worst has been averted, at least this year.

And a deal has been reached with Greece. Nothing is signed, the Germans think it’s insufficient, and Greeks are protesting nationwide, but somebody agreed to something. Not that the markets care. Greek fatigue has reinforced the mindset that it doesn’t matter. As one pundit put it last week “it (Greece) is the size of Delaware.” That may be, but Greece will set the benchmark for larger and more problematic nations such as Portugal, Spain and Italy.

Regardless, a Greece accord wasn’t the watershed. It was the three-year funding mechanism that serves as Europe’s version of quantitative easing. Although it ignores the underlying problems, the long-term refinancing operation - or LTRO - alleviated the immediate pressure on the banks.

The LTRO reminds me of the Michael Clark Duncan character in The Green Mile. He played the death row inmate gifted with the ability to see evil and suck disease out of people. In doing so he endured the pain of the person he saved. That describes the ECB. The question is will the ECB recover and will the patient relapse down the road?

Fortunately those questions are irrelevant for 2012. With bank liquidity issues off the table, yields on Spanish and Italian bonds have stabilized. And if a disorderly default of Greece can be averted, Europe’s negative impact on the global economy will be minimized, at least for now.

Europe will not avoid recession. That ship has sailed. And I continue to believe that our growth will be hindered by Europe’s downturn, but not enough to cause our economy to go negative. In large part that’s because our economy is gaining momentum.

January’s job report exceeded everyone’s wildest expectations and the employment numbers continue to improve. Last week initial jobless claims declined by 15,000 with the four-week moving average hitting its lowest level since April 2008. This year’s positive employment news is a strong indication that the numbers registered in late 2011 were not a seasonal fluke. More data is needed but the signs are very encouraging.

On the down-side, housing remains in the dumps and that isn’t likely to change appreciably this year. Nor will the latest government band aid have a material impact.

All this settlement has accomplished is to extract $25 billion worth of flesh from five banks which will be used to compensate the poor souls that had guns to their heads when they decided to purchase a home they couldn’t afford.

It goes without saying that those who continue to meet their mortgage obligations will receive no assistance from Washington, regardless of how large an equity loss they have suffered. I can only assume that responsible home owners are considered part of the one percent.

Funny though, the bulk of mortgages – those bought or guaranteed by Fannie Mae and Freddie Mac - were not part of this settlement. I’m sure it was an oversight, you know, like exempting Congress from insider trading laws. No doubt the government will soon penalize itself for the massive stupidity it helped facilitate.

But until such time, if you were fortunate enough to have conducted business with a bank that settled, you will be compensated in one of two ways. If you failed to pay your mortgage and were foreclosed upon, you may be eligible to receive a cash payment of $1,500 to $2,000. If you are current on your mortgage but were shrewd enough to put so little down that you now owe more than your house is worth, you’ll be eligible for principal reduction.

However, for those stupid enough to have felt morally obligated to have paid your mortgage despite being underwater – or were foolish enough to have applied a sufficiently large down payment that your house is still worth more than your loan – you get bupkis.

Wait, let me correct that: you’ll be subjected to higher banks fees as the banks that settled – and potentially others – will recoup the lost funds by passing the cost on to their customers.

As for the banks, you’ll be comforted to know that the settlement may actually help the stocks. That’s because the losses have already been reserved and the agreement lifts a financial black cloud.

Luckily, outside of the housing/construction sector, the underlying economic fundamentals in the U.S. continue to improve. The auto industry is mounting a comeback, corporate earnings remain strong and guidance remains relatively optimistic. This bodes well for the economy and stock market for the year.

How well? The Federal Reserve – who doesn’t miss a trick - cites an uncertain tax policy, housing and Europe as potential headwinds. Since November they have lowered their estimate to between 2.2 and 2.7 percent growth. I lack the Fed’s resources so I use the poor man’s approach to forecasting. Knowing that the government tends toward the optimistic I take whatever they say and deduct 0.5 percentage points.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso can be reached at tparadiso@tds.net.