2012 is proving to be the ‘Year of the Central Bank’. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.
The Greek government has agreed to reduce government employment by 150,000 workers by 2015, to cut the minimum wage by 20 percent (and by 32 percent for those under the age of 25); and to weaken collective bargaining. All of this will have the effect of reducing living standards for workers and redistributing income upward.
The economic theory behind these changes is that of “internal devaluation,” in which wage costs, lowered by the recession and high unemployment, are pushed down far enough so that the economy becomes more competitive internationally and can recover through exports. But after four years of recession and reaching record-high unemployment, Greece’s Real Effective Exchange Rate is still higher than it was in 2006. In other words, there has still been no internal devaluation.
Various forms of push-back on the dividend-paying theme have been a mainstay during our career in this industry. During the 1990s, for example, we were told that a dividend initiation or increase was corporate admission of low future earnings growth. Arnott and Asness (2003), Zhou and Rudland (2006) and others —including ourselves— have shown that this low-growth generalization fails empirical scrutiny.
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Our recent reports (please see our January 11 and 25 “Canadian Equity Strategy (Bi-weekly)” reports) have approached the dividend theme from two different angles, i.e., growth and yield. Both are successful in achieving
superior returns on an absolute and risk-adjusted basis, and both styles merit consideration when building a portfolio. When asked to choose one over the other, our answer is simple: buy into both or, simply put, “go 50-50”.
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Over the past three years, which can be characterized by volatile market conditions, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600.
Moreover, a new tax holiday would increase budget deficits by tens of billions of dollars over the coming decade. And unlike the 2004 repatriation holiday, which was sold as a “one-time-only” event, a second holiday would send a powerful message to corporations to shift investment and jobs overseas and hold the profits there — until yet another tax holiday is declared. Indeed, enactment of another such tax holiday would further embed the shifting of investment, jobs, and profits overseas as a major tax avoidance strategy for many U.S. multinational corporations.
U.S. corporations have already figured out how to bring back money and pay trivial tax rates.
“Sophisticated U.S. companies are routinely repatriating hundreds of billions of dollars in foreign earnings and paying trivially small U.S. taxes on those repatriations.”
As specified in law, and to provide a benchmark against which potential policy changes can be measured, CBO constructs its baseline estimates of federal revenues and spending under the assumption that current laws gener- ally remain unchanged. On that basis, the federal budget will show a deficit of nearly $1.1 trillion in fiscal year 2012 (see Summary Table 1). Measured as a share of gross domestic product (GDP), that shortfall will be 7.0 percent, which is nearly 2 percentage points below the deficit recorded last year but still higher than any deficit between 1947 and 2008.