Eye on the Market April 1 2013 J.P Morgan Topics: American vs European Roulette, rising US equity markets and continued European underpeformance Compared to Europe, the US is running easier monetary and fiscal policy, and playing a game of American Roulette: gambling that eventual withdrawals will take place at a time of higher growth, and will thus be less disruptive. On fiscal policy, after the cyclical increase in tax receipts and decline in unemployment insurance, the US fiscal deficit is projected to be —5.5% by the end of 2013. Assuming the sequester remains in place and interest rates remain low, CBO projects a deficit of 3.7% for 2014 and 2.5% for 2015, with debt stabilizing at -75% of GDP. However, in 2015, mandatory entitlement spending and interest start to grow more rapidly. The US is tabling this issue to another day; US equity markets seem to like the idea. There is evidence that with the help of easy money, the US private sector is recovering. As shown below, household debt service has declined to 1990 levels, and the number of consumers using credit is rising again (from a low base). Modest payroll gains and fewer jobless claims have contributed to rising auto sales and consumer spending; this is a mild surprise given recent increases in payroll and income tax rates. Housing is on the mend (particularly in states worst-hit by the crisis), and inventories continue to decline. Home sales and home prices are rising in most locations, which are driving furniture and building supply sales. By the end of 2013, the % of Americans with underwater mortgages should decline below 20% from 35%4- at the peak. However, housing is improving off such a low base that the contribution to GDP from residential construction is only -0.5%. And while labor markets are getting better, they are not showing the substantial improvement the Fed cites as the criteria for ending its asset purchases. As a result, the Fed is adding to its 50 Trades of Grey ($2.5 t