Deficit Spending Gone Wild

For the fiscal year ended September 30, 2013, the US recorded the smallest fiscal deficit in five years. At just over $1 trillion, statesmen and economists from across the nation congratulate themselves on a job well done. The sequester and rising tax rates aside, this feat is universally attributed to economic growth (and the resulting tax take on that growth), the Keynesian "prescription" for economic recovery that has kept Paul Krugman's bearded face affixed to a regular column over at the New York Times. Those proclaiming victory over recession quickly point to a reduction in the ratio of deficit to GDP, now falling for the US to a modest 6.55%.  A further sign of our progress in righting the ship.  

From the nosebleed seats at which we climbed to watch prior years' deficits spiral up to $1.4 trillion, this new level of spending beyond our means has to appear humble, noble, if not awe inspiring. Of course, not a moment has been wasted by those in Washington seeking to claim credit for this accomplishment, eager to compare our new economic prudence to those unprincipled nations of peripheral Europe, still wracked by deficit spending. While the US deficits still exhaust more global capital than the next 7 major industrial nations combined, this must all be taken in context, you see.

The US, they are quick to caution, has carefully managed its fiscal deficit down to a rate below that of many third world nations, the UK and of course the European periphery, where in recent years the much maligned Spain and Greece have flagrantly floated deficits of 13.3% and 24.23% of GDP, respectively.

But this has us thinking. Where exactly is it written that government deficits should be measured in relation to gross domestic product (of all sectors of the economy) in order to weigh their significance to an economy (or the prudent management of governmental budgets)? Well, yes, in the treaties creating the EU, where all participating nations pledged to limit deficit spending to under 3% of GDP. But no one paid attention to that, with literally every nation in the EU (including Germany) breaking this promise, often repeatedly. Is GDP the appropriate measure to judge how modest or excessive deficits have become? Or is the measure of deficits to governmental revenue a more appropriate measure of the extent to which a government is leveraging its tax base?

And that's the thing about the trillion dollar plus deficits that the US has racked up in each of the past five fiscal years. It's the amount that the deficit exceeds the revenue base that to us, is so startling. It implies that all things being equal, tax rates would have to increase by nearly 50% to balance the budget. Measured in this light, even the most recent US fiscal deficit of $1.09 trillion places us second only to Greece in quantifying our flagrant mis-management of the Federal budget.

What's at Stake with the Debt Ceiling and Fed Tapering

The media these days is feasting on the political posturing in Washington over the debt ceiling. Fueling hysteria is, of course, something of a preoccupation of the American media. The public, always eager to line up on the left or right of any issue, has its opinions of who's to blame for the crisis and what should be done to resolve it.  But what's really at stake?  And how does the Fed's decision to taper its QE program fit into this?

Few would argue that taking the country to the brink of default over the debt ceiling makes sense. Truthfully, this is highly unlikely.  The debt limit debate is something of a sideshow for political junkies only. There is little likelihood of an actual default on the debt.  Despite the impending debt ceiling of Oct 17, the Treasury has the existing authority to refinance maturing notes.  While the gov't is shutdown and even if the cap isn't lifted, which it will be, the Treasury will continue to take in $250 b a month in revenue which can easily be prioritized to pay the $30 b or so for interest. Political theater. Good for ad revenue, bad for just about everything else.

But this controversy does raise the question of what our national debt looks like currently and, given the massive deficits financed over the past five years, how fast and far it has grown. Here's a picture of where we are now. Yes, it's the slope that matters and as you can see, it has steepened considerably in recent times.

But many believe the national debt is not a serious problem for the country and point to the interest on the national debt to make their point. As can be seen from our next chart, total interest has actually been falling as a percentage of total US government expenditures. In fact, interest on the national debt now comprises the smallest portion of the Federal Budget the country has seen in the past twenty years!

Here's another take on the US debt burden, showing total net interest in dollars compared to total Federal spending over the past twenty years. Again, it's hard to see what all the fuss is about (the source for all of this data, by the way is the Federal Reserve Bank of St.. Louis).

But here's the rub.  Look at what has happened to the rate of interest accrual on the debt or the net cost of capital for the US government over the past twenty years.  By taking the total net interest payable by the US each year and dividing by the total debt outstanding, we can calculate the implied average cost of that debt.

So now we begin to have a much clearer picture of what's going on. The decline in interest rates over the past five years resulting from the Federal Reserve Bank's unprecedented policies of zero interest rates and quantitative easing have greatly reduced the cost of funding the national debt. We can refer to this as the "Benanke Bequest". In fact, as we now know, the Fed has suppressed interest rates to where they are below the rate of inflation, such that "real" or inflation-adjusted rates of return on US Treasury securities are negative. Economists have referred to negative real rates as "financial repression" to imply a significant and, again, nearly unprecedented repression of the assets and wealth of savers in the US.

This fundamental issue of the effects of financial repression on savers, senior citizens and young families, aside, concern also rises in terms of what the US debt burden will look like when interest rates in the economy are normalized.  For this, we look to the following chart.  If we recompute total interest expense for the US over the past twenty years using the historical average rate of 5.5% (twenty year average) we see the very significant difference between actual and normalized interest expense for the US, as a percentage of total spending. Quite a different picture!

Lastly, we can plot this differential separately for the period 2008 - 2013, to give us a sense of how much added interest expense we avoided, due to the Bernanke Bequest, and what we very well may soon be looking at funding in the years ahead.  Note the scale is in billions of US dollars.  At 25% of total government spending, the interest on the national debt suddenly appears unsustainable.

In our view, this consern is what is causing the Fed to hesitate on tapering its purchases of Treasury securities under QE. The fact that the mere mention of tapering sent the debt markets into a downward spiral this past June-July has frightened the heck out of the Federal Reserve. Because, more than anything, the Fed is well aware of the role the Bernanke Bequest has made in allowing the US to shoulder the crushing additional debt load of the past five years. At the same time, the Fed is equally aware of the effects of continued monetary printing on debasing the currency. The Fed has thus painted itself into a corner. Taper and risk unsustainable levels of interest on the national debt (and also likely crashing stock and bond markets). Continue QE indefinitely and risk a currency crisis. Don't look to Washington to figure this one out.

A New Gilded Age

The period of the late 19th century, following the end of the civil war and before the arrival of WWI is now regarded as the Gilded Age, a period in American history where fortunes of previously unheard of levels were now being made by the likes of John Rockefeller in oil, Andrew Carnegie in steel and the railroad "robber barons" Vanderbilt and Stanford, as they became known.  The Gilded Age, its growing industry and unprecedented wealth soon attracted numerous European immigrants, with the greatest wave of these reaching American shores by the early 20th century.  Amidst all these riches, however, Wikipedia cites the Gilded Age to be one of equally, or perhaps unequally, great poverty in America with the average income of most families below $380 per year.

Social scientists and economists are now drawing parallels of the vast and growing income inequality of America today to that of the late 19th century.  Some have called it the second Gilded Age.  Without question income and wealth inequality is on the rise.  This fact was most recently pointed out in a number of articles that site the fact that just under 20% of the total income in America in 2012 went to the top 1%.  This is the highest share since 1928.  The top 10% earned a whopping 48% of total earnings last year. Perhaps more staggering, since the beginning of the economic recovery in 2009, 95% of income gains have gone to the top 1% of the population.  

At the same time, median household income has fallen for the fifth straight year for a cumulative loss of 8.7% (versus 2007).  Median family income is now the lowest, on an inflation adjusted basis, since 1995.   

Some have blamed Obama, some the culmination of prior administration policies.  Truth be known, Congress has very little direct control over income (other than by confiscating it through taxes) and the White House, even less.  Nonetheless, the evidence of inequality is irrefutable.  So if not administrative policy, what has changed over the past five years that might contribute to such growing income inequality? Monetary policy.

Since the onset of the Great Recession, the Fed has relied on two tools of monetary policy.  Short term interest rates, anchored by the Fed Funds Rate and Discount Rate, were dropped abruptly by the Fed in 2008.  Next Chairman Bernanke deployed a series of unconventional policy tools, known as QE or Quantitative Easing, the purchase of US Treasury and Mortgage Securities by the Federal Reserve.

Today, the Fed's balance sheet has swelled to $3.5 trillion of these securities, with new purchases added at the rate of $85 billion per month.  The recent talk of "tapering" is designed to gauge the level of reduction in the rate of monthly purchases, a phenomena the capital markets regard as tightening of policy.

Aside from the dubious benefits or market-related effects of QE, several things are clear as it regards our topic of income inequality.  First, the Fed's zero discount rate policy or ZIRP has simultaneously dropped the cost of funds of banks on deposits to zero (or near zero) while also lowering the rate of return to investors on bank deposits to this same rate. Economists have called this "greatest transfer of wealth from savers to the banking system in US history".  The banks have been substantially recapitalized through this process, at the expense of savers.  

Bank stocks have rallied, with the Fed shoveling cheap cash their way, which the banks have been all to eager to invest in the rising stock market.  It then should come as no surprise to anyone that the dominant US banking capital of New York has the worst inequality (or highest GINI coefficient) of any state in the country.  The top 1% of New Yokers earn 35% of total income.  The bottom 50%, just 9%.

Second, because the rate of interest on savings deposits, short term US treasury bonds and other fixed income securities, has been less than the rate of inflation, economists have referred to this negative real interest rate phenomenon as "financial repression".  Financial repression favors the issuers of debt, like the US government, and punishes investors in that debt who see their rate of interest turn negative when adjusted for inflation.

Lastly, QE was designed in part to lower mortgage rates in the economy, but also to promote a wealth effect by boosting the value of financial assets, principally stocks.  Given that stocks are disproportionately held by the wealthy, however, these capital gains have been disproportionately owned by the wealthy.  Now, also by surprise, we find growing income inequality among this very same group.

So let's recap what Fed policy has promoted over the past five years.  First, it has favored banks through low interest rates, at the expense of savers.  Second, it has favored the wealthy, as disproportionately large owners of stocks, from those of lesser means.  Lastly, it has punished retirees, young families, non-profit organizations and others seeking short term savings investments through low rates of return.  While we grouse about growing income inequality, the fact remains that the Fed today, more than that of the current or past administration is the party most directly responsible for this outcome.

Earnings, Multiples and the Stuff We Overlook at Market Tops

The new record highs for the S&P and DJIA indices has spurred a great deal of discussion about what's driving the market to new highs.  The doubters look to the Fed and the Bernanke Put as setting a floor under equity prices.  The bulls look to relentless corporate earnings and fattening balance sheets to justify valuations.

Thus as it's always been, a battle of bulls and bears providing equilibrium to the markets.  With the macro data once again turning negative (for the fourth straight spring cycle), Asia weakening and Europe part in recession and part in full-scale depression, we are compelled to dive deeper into the puzzle of US corporate earnings for answers.  After all, when the US economy stalled in 2010 as stocks steadily advanced, the bulls educated us all on the percentage of US multi-national sales that came from a then healthy EU and a roaring Germany.  When these markets faltered, they redirected us to Asia.  These same voices are now advising we look inward to corporate balance sheets.

And, no doubt, balance sheets are in great shape (at least for large companies) thanks to the Fed greatly reducing refinancing costs and boosting stock prices.  But balance sheets bolster corporate solvency and credit-worthiness not earnings.  It's peculiar testimony to the uncertain operating environment corporations face that their highest and best use for cash is to recycle it to shareholders. The accelerated use of share repurchases may be driving stock prices higher, but shrinking the balance sheet is not a formula for organic growth in any textbook we've seen. 

Earnings, however, are different.  They are clearly a sign of growth, purpose and value, even if you overlook the lack of top line revenue from which they derive.  But earnings growth is also slowing and valuation metrics are increasingly stretched.

Goldman's Chief Equity Strategist David Kostin today released an uber-bullish call on US equities.  The essence of his model is that a forecast 2013 earnings growth rate of 11.3%, accompanied by further multiple expansion, must lead to higher share prices.  Well, that's simply arithmetic, isn't it?  Assuming you accept the assumptions.

Kostin cites the current market p/e multiple as a forward multiple of foretasted earnings, as is increasingly the common practice, rather than price over trailing twelve month earnings (TTM) as until fairly recently was accepted market convention.  This is undeniably what tends to happen at market tops when valuations get stretched:  people create new and improved metrics.  Those of us who lived through the tech boom/bust of the late 1990s, early 2000s will recall how during the boom cycle p/e ratios were upgraded to p/e/g ratios, arguing that p/e ratios must be adjusted by the growth rate of earnings to properly value modern high tech companies against stodgy old makers of laundry soap and toothpaste.  No one seemed to mention p/e/g ratios beyond 2001.

Kostin references the current S&P market p/e as 13.3 on its way to 15 by 2013 and 16 by 2015.  Hmm.  Well, these are first and foremost forwardly looking p/e ratios, because the TTM on the S&P as of today is a hearty 19.2 (for the Russell 2000, by the way, it's a juicy 35.66).  But this phenomena of overstating future earnings, only to downwardly revise throughout the year, has been the pattern of the last two years.  So now Kostin advises that we approach 2013 with a forecast for earnings that may be 10% too high (relative to what we may actually realize) and then slap a greater multiple on those earnings that will undoubtedly bring the p/e TTM measure into nose bleed territory.

Add to this the practice of borrowing to fund share repurchases and corporations easily meet higher EPS targets not through growth in operating earnings, but through a lower share base.  As the p/e is commonly calculated by simply taking the price per share and dividing by earnings per share, an inflated EPS (as a result of share repurchase) will artificially lower the p/e.  These are the kind of things we overlook when trying to convince ourselves that we're operating within reason at market tops.

X-12-ARIMA

We've written several posts on the subject of the seasonal adjustment of data from Commerce, BLS and US Census departments.  The beast that crunches the seasonal adjustment modelling for the Census Department is simply known as "X-12-ARIMA".  The raw (unadjusted) data is pumped in and X-12-ARIMA takes care of everything else.

Here's a look at how powerful the seasonal adjustment factors (SA) are with respect to time series data for the unemployment rate.  The blue line is the reported seasonally adjusted data.  The red line is unadjusted. You can see how lumpy the unadjusted data is, lending credence to the argument that the data should be reported SA, in order present a more cogent picture of employment trends, through seasonal periods.

While the smoothing perhaps presents a clearer picture of trend, at the same time the SA data does not reflect at any point in time the true unemployment rate (unless the two curves periodically intersect).   For instance, for January 2013 when the unemployment rate was reported as 7.6%, the actual rate (number of persons reported unemployed/labor force) was approximately 8.5%.  No big deal.  The two trends are moving lower.  But what about other time series data?

The retail sales data on an unadjusted basis shows a similar lumpy pattern (red line).  The pattern here is again smoothed by the seasonal adjustment factors.  But with retail sales, the distortions caused by adjusting data may be more meaningful.  We all know retail sales climb during the holiday season at year end. We also know that sales tend to fall off in January once the bills arrive.

But what is interesting are the portions of the graph below the SA line and above the unadjusted line.  What these gaps represent are periods where the seasonal adjustment overstates true retail sales activity in the economy.  

While the SA factors tend to mute the explosive growth in retail sales during the holiday period at year end, these factors then consistently overstate economic growth during periods of greatest sales declines.  This is equally true with employment, which also peaks in Q4 and troughs in Q2.

As can be seen from the graphs above, the most significant impact of both of these adjustments occurs during the first half of each year (Q1 for retail sales and Q1-Q2 for employment).  Since financial markets trade off the headline numbers for both which, again, overstate activity during Q1-Q2 of each year, this consideration might explain the pattern of the stellar performance of stocks during the first quarter and the consistent "spring swoon" that we've seen for each of the past three years.

Light Dawns on Marble Head

A friend of ours was fond of using the expression, "light dawns on marble head" as he slowly perceived what he believed to be obvious and right there before him had he only been more attentive.  So it may be with all of us, from time to time.  Sometimes things are not at all obvious, though, and we're simply being modest, as was the case with our friend. Sometimes it's simply a matter of jotting things down that can be viewed in plain sight.

Plotted below is the yield on the 30-year UST at roughly its high and low marks for the year, for each of the past four years (2010-2013).  The cyclical high yield in each year has come in the rather narrow period of late March – early April.  In fact, the high yield has printed in a period spanning no more than 26 days!  US Treasury bonds, particularly at the long end of the yield curve show their greatest price reaction to economic strength or weakness, signs that their greatest foe, inflation, might be creeping in or receding.  Hence, when the economy appears to be at its strongest, the 30-year trades its weakest and prints its high yield for the cycle.

The cyclical low in yield for the 30-year has occurred in a somewhat wider range over the past three years, from late July – early Sept (too early to tell for 2013).  While this is a wider period than its high yield mark, this data still indicates a span of less than 45 days.  Now, perhaps this is purely coincidental that the 30-year would signal its greatest price strength and weakness at precisely the same time each of the past four years.  Or perhaps, there's some pattern worth discerning.

Why this pattern might occur requires some speculation, but as another friend of ours was fond of saying, "numbers don't lie".  We believe the reason for this trend is the economic false-starts we’ve seen for Q1 for the each of the past three years and, we suspect, carrying over into Q1 2013.  As discussed in  a previous post on this blog, the data from BLS and Commerce have been favorable in each winter period for the past four years, causing bond prices to weaken, only to fall off in spring and summer (causing bond prices to rally).  

We believe that this pattern is not coincidental, but rather relates to the seasonal adjustment models that the two departments use to account for what they believe to be normal seasonal patterns. If true, these factors are distorting the picture of growth in the winter months, causing the UST long bond to weaken substantially (in price) only to recover strongly as that growth fails to carry forward into the warmer months. 

The best description of the seasonal adjustment factors we've seen was in a blog post to the Washington Post:  http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/05/wait-the-u-s-economy-actually-lost-1-2-million-jobs-in-july/

Too Much Eggnog Over at Commerce?

"US Retail Sales Beat in February, Topping Consensus Forecasts".  "Retailers got an Unexpected Valentine from Shoppers: Strong February Sales". "US Retail Sales Rose in February by the Most in Five Years".  "Retail Sales Surprise to the Upside in February". 

So what do those four headlines have in common?  Hint: they are not varying reports of the February 2013 US retail sales number.  Rather, they are reports of February retail sales for 2010, 2011, 2012 and 2013, respectively.  Similarly, the employment data for February 2011, 2012 and 2013 surprised to the upside.  In each case, however, for both retail sales and employment, the numbers softened by mid-Spring into Summer, disheartening investors who were convinced that the long awaited green shoots of economic recovery were finally taking root.

Now we can ask, what is it about the US economy that causes the data to be so strong in January and February only to slip back into weakness a few months later?  Or, we can ask, what is it about the seasonal adjustment models used by BLS and Commerce that cause consistently false positive readings on the economy during the winter months?

There have been numerous articles written on this topic, but a recent article on ZeroHedge confirmed our suspicions that the seasonality models might be in need of some, well, adjustment.  What they found was that the surprisingly strong February 2013 retail sales number of 1.1% (vs expectations of 0.5%) before seasonal adjustments "actually posted the first sequential decline since 2010, as retail sales declined from $382.4 billion to $381.0 billion: this was the first sequential decline in retail sales in the month of February in three years (http://www.zerohedge.com/news/2013-03-13/adjusted-february-retail-sales-rise-more-expected-actual-retail-sales-post-first-dec).

Maybe it's time for Commerce and BLS to examine whether the consistent sputtering of the economy throughout the first half that we've seen in each of the past three years might be more their form, than the economy's substance.

The Abenomics of Japan

The market reaction to the new Japanese Prime Minister has been nothing short of eye opening.  With bold claims to battle deflation and revitalize the Japanese economy through competitive devaluation of the yen, markets around the world have been put on notice.  This is one determined dude.  Without any program of intervention actually underway, and merely a claim to begin fighting the yen sometime next year, the currency immediately entered a spirited decline, dropping from its high of 77.11 back in September to its current low of 96.12.

The Nikkei has rallied in support, reaching a new multi-year high of 12,239 on the promise of new BOJ leadership supportive of Abe's plan.  All that's left now, is for commentators to draw historical parallels to prior "currency wars" and for Christine Lagard of the IMF to declare this a currency issue, but certainly not a war.  China, always eager to jump on the bandwagon of Japan bashing, accused Japan of what the US has accused China of and for which the US is, of course, leading the parade.

As the world is increasingly convinced that all economic difficulties can be solved through currency debasement, we sit here thinking the world has really gone quite mad.  We know the argument.  Weak currencies foster competitive industry in a global marketplace, while stoking inflation as the the local consumer pays more for everything they import.  We get it.  But it's dumb.  At least for developed economies.

For many years, growth in the developing world has been built around this principle. Employ cheap surplus labor to build products that can be sold to rich people in the West.  Local manufacturers cannot compete on price, as to the labor component, and if you can turbo charge it all with a weak currency, so much the better.

But Japan today is quite different.  It is a mature, highly educated and wealthy society, with an enviable standard of living.  It's problems are demographic in an aging and declining population, economic in a heavy government sector debt burden (236% of GDP) and social, in a high standard of living for what was once an export dependent economy.  For the first time in memory, Japan is posting a trade deficit, reversing seemingly endless periods of surplus.

The strong yen was derived in part from a view that despite the country's large budget deficits and high debt burden, a high resident savings rate allowed Japan to largely self-fund its deficits.  No need to rely upon the trade surpluses of other nations to pick up the slack, the way the Chinese and Japanese have so graciously done for the US.

All these historic trade surpluses, however, have put Japan in an enviable position, at least compared to the US.  According to a recent article by Bloomberg News, Japan surpassed China as the largest holder of US securities in 2012, at $1.84 trillion and the second largest holder of US Treasury bonds (behind China) at $1.12 trillion.  In many ways, this makes the Japanese problem less insoluble than that of the US.

Japan should enter a course 180 degrees away from that charted by Abe.  They should begin selling their holdings of US dollar denominated assets and using the proceeds to reduce their own debt.  This "reverse" intervention would cause the yen to appreciate in value, not only through the currency transactions directly but through a perceived strengthening of the currency on the basis of the stabilization of the country's fiscal imbalances.

A stronger yen would hurt their export sector, perhaps, but Japan's real problem with exports (as with the US) is excessive labor unit costs by global standards.  Quite simply put, if Japan wants to compete in the markets for manufactured products that the world perceives to be commodities, without technological or qualitative distinction, it has to lower its standard of living, not its currency.  This, again, is equally true of the US.

A stronger yen, however, will lower the cost of imports for Japanese consumers.  It will stretch their dollar further, so to speak, at home as well.  And it just might break, rather than contribute to the deflationary spiral by stimulating consumption.  Ask yourself: if a Japanese businesswoman needs to fill her car with gas on the way to work and finds that it costs her the equivalent of $70 rather than $110, is she going to delay filling up, hoping that prices are lower next week?  Of course not.

If she saved $40 on gas, is she more or less likely to pick up a nice bottle of French wine with dinner at the market?  Particularly, if it cost the equivalent of $25 rather than $65. And would these lower prices and greater spending power make her feel poorer?  Unlikely.  And if interest rates were raised so she and her family could see their savings rise, this might not hurt their wealth effect either.

A stronger yen would boost final demand rather than weaken it.  And for a modern Japan that can no longer produce the best quality at the cheapest price, internal demand may be far more important to the country's economic future than the old model of currency debasement and export dependence that Abe is preaching.

Driving Over the Fiscal Cliff

With Friday's deadline for the sequester now past, it might be time to take stock of how this whole Fiscal Cliff matter was resolved.  You'll recall, Ben Bernanke first coined this term in respect to several contractionary forces that faced the US economy at the end of 2012.  These items included the sequester, the expiration of the Bush tax cuts (including dividend and capital gains), the expiration of the payroll tax cut and the imposition of the Obama health care tax.

The months leading up to December 31st were filled with great theater, fueled by the Obama administration's fear mongering and the gravitational pull toward sensationalism by the news media.  Reports were widely circulated that the Fiscal Cliff would result in some $600 billion of combined spending reductions and tax hikes, enough to snuff out a fragile economic recovery and send unemployment soaring. JP Morgan broke out the effects of the various tax and spending items on its forecast for 2013 GDP as follows:

At year end, America breathed a collective sigh of relief as politicians reached a stumbling, bumbling eleventh hour aversion to the crisis, as the always weepy Boehner knuckled under while the triumphant Obama prevailed on his new found goal of deficit reduction through tax hikes for the wealthy.  Nothing much else happened at year end, other than the tax hikes and of course, a swift punt of the remaining issues to a later date.

Surprisingly to us, economists, politicians and pundits alike now cheer the outcome as we tipped away from the precipice.  But now, less than 90 days later and taken in the context of Friday's relatively uneventful start to the sequester, it might make sense for us to re-examine what really happened up there on that cliff.

Of the four elements to the cliff (tax hikes on the middle class, tax hikes on the wealthy, expiration of the payroll tax cut, imposition of the ObamaCare tax and the sequestration) all, with the exception of the tax hike on the middle class have now taken place.  From a total of $600 billion in projected fiscal drag, perhaps as much as a total of $400 - $450 billion of these measures are now in effect.

So, by most measures, we went over the cliff.  Albeit, from lower elevation than we had been warned, but still likely high enough to hurt.  Add to the pain, the projected $150 billion in further drag from higher gasoline prices and it looks like we're going to get a good peak at just what was beyond that cliff after all.