As the year wraps up for 2012, markets continue to benefit from the Fed's ever corralling of investors to seek returns exceeding treasuries. Wall Street claims the US is only in need of a resolution to the fiscal cliff problem to resume an even greater growth trajectory. Proof they say comes primarily from the recovering housing sector and in the never ending story of cash on the sidelines and strong corporate balance sheets.
Regardless of the fiscal cliff, although certainly made more troubling if no agreement is ever reached, is an economy weighted by dismal job growth prospects as a result of demographic and structural productivity changes effecting future income potential for its citizens. The US economy may be at the end of a powerful economic run starting after WWII which had tremendous spill over in job opportunities engined from investments in infrastructural, housing, and technology. And while modest economic growth will continue, job and income upside may be capped for generations.
Equities are currently pre-priced for the next leg up and commodities correspondingly are priced to accommodate growing demand. The Fed has helped a recovering economy by keeping rates extraordinarily low. But like all actions, there are multiple potential outcomes and not all of them are positive. The Fed believes if they accommodate long enough the same economic mechanics which worked in the past will catch on again. But the reality is equity and commodity markets sit atop a massive rally supported by pathetic annual growth rates and future expectations. Playing the odds on that continuing is risky.
