6 Things We're Not Thankful For

On Friday, we took a look at some of the reasons investors have to be thankful this holiday, including the relative lull in the European sovereign debt crisis and the housing market recovery. But just like the fifth reheating of the turkey leftovers, there are plenty of things this season for which to be less than thankful.

Unemployment
The jobs picture is undoubtedly getting better in the United States. But it is still bad. The unemployment rate stands at 7.9% while the broadest measure of unemployment (the U-6 rate which includes, among other things, discouraged workers and those working part-time because they can't find full-time jobs) is 14.6%. Long-term unemployment remains a serious problem, as well. Five-million people have been looking for work for at least six months, a full 40.6% of the unemployed population. It's going to be a very long time before the economy will be able to regain the jobs lost during the downturn.

Slow Growth in Europe
The recession in the eurozone isn't good news for anyone. During the third quarter, growth slowed 0.1% from second-quarter levels and was off 0.6% from third-quarter 2011 levels. That comes after a 0.4% contraction in the second quarter and zero growth in the first. This is hardly a catastrophic drop-off, but it underscores how challenging it will be to mitigate the sovereign debt crisis. 

In order to stem the crisis over the long run, Europe needs to restore its competitiveness by loosening labor markets and making potentially painful fiscal adjustments. But these adjustments are hurting growth in the short run and are making already high debt/gross domestic product ratios look even worse by shrinking GDP and lowering revenues. And sticking to austerity plans over the long haul is made that much harder with poor growth. 

The good news here is that there still is some positive news in Germany. The country's GDP grew a respectable 0.9% year over year, and unemployment remains low. This has made it that much easier for Germany to serve as a de facto backstop for the weaker eurozone countries. The question is, what would happen if German growth were to follow the peripheral countries downward?

Political Will in Europe
Looking past the aforementioned growth problems in Europe, politics could also pose a threat to the current lull in the crisis. The quiet in Europe at the moment is being driven by a few factors, but the biggest is European Central Bank president Mario Draghi's pledge to do anything necessary to keep the eurozone together. The ECB is now committed to buying the sovereign debt of any country seeking a bailout, keeping borrowing costs low and allowing nations to refinance debt at reasonable rates. That pledge only works in conjunction with the bailout process working, and that is being kept going by a German government that is showing increasing willingness to be flexible and a Greek parliament willing to approve new austerity measures. 

But how stable is this arrangement? German elections are set for next year, and the voters could send a rebuke to this accommodating attitude. The Greek coalition looks shaky, and as the first round of Greek elections earlier this year and ongoing protests in the streets showed us, there is a huge amount of public anger about the continuing cuts. Spain is another potential wild card. There is still chatter about the region of Catalonia seceding from Spain (regional elections are being held today), and there is plenty of popular unrest across the entire country. It's not hard to see how European politics could rip off Draghi's Band-Aid as the crisis flares up again.

China Slowing
There is no question that the Chinese economy is slowing down. After years of 10% growth, China is now experiencing what Morningstar's Dan Rohr describes as a hangover from a "credit-fueled investment binge." He just doesn't see the level of fixed-income investment that China has made during the last decade as sustainable, and the slowing of that investment will put a drag on the entire Chinese economy. This of course is going to be a drag on all sorts of players from industrial firms selling into China to the economies in the rest of Asia. Surely there is plenty of growth left in the consumer sector, and Chinese growth will be impressive compared with that of the developed world. But that 10% figure is likely a thing of the past.

Fiscal Cliff
Since the U.S. elections, the fiscal cliff seems to be all anyone wants to discuss. The focus on the tax hikes and spending cuts isn't totally misplaced. The nonpartisan Congressional Budget Office says that if we don't fix any part of the fiscal cliff, the economy will be shoved into a mild recession and unemployment will start rising again. But it is important to note that the chances of going over the entire cliff are relatively small. There is broad agreement on dealing with parts of the cliff, such as the lifting of the Alternative Minimum Tax ceiling or the sunset of the payroll tax holiday.

The real showdown is over bringing in new revenues. Although there seems to be some increasing consensus over the idea of leaving marginal tax rates where they are and instead limiting deductions, this will be much easier said than done. It will be very difficult to remove long-standing tax expenditures like the mortgage interest deductions and breaks for charitable giving. Putting a ceiling on the amount of deductions that can be taken is easier but will still squeeze nonprofits. It is quite possible that both sides will reach an agreement on revenues, but there is still a tail risk that a deal can't be reached. Add in the fact that the debt ceiling needs to be raised again to avoid the problems we had in the summer of 2011, and it is clear why the market has been skittish.

Rising Health-Care Costs
No matter what kind of deal is eventually reached this year on fiscal issues, it will likely help, but not solve, the United States' long-term fiscal woes. That's because the big wedge that is driving the deficit ever higher is health-care spending, and it seems unlikely that Washington will reduce costs enough now to bring costs under control. 

The CBO estimates that spending on Medicare, Medicaid, the Children's Health Insurance Program, and exchange subsides will boost spending from 5.4% of GDP today to anywhere between 9.6% and 10.4% of GDP in 2037 depending on what parts of the current law are implemented. Social Security on the other hand increases a much more modest amount from 5.0% of GDP to 6.2% of GDP during the same time period. 

Now of course, making predictions about what the budget will look like 25 years from now is fraught with difficulty. But it isn't a stretch to see that as the population ages and if health-care costs keep rising faster than inflation, this is going to be a major problem for the country's fiscal health. No matter what short- or medium-term deal is hatched this year, tackling these entitlements remains our long-term problem.