Daily State of the Markets
Friday, December 28, 2012
The question of the day continues to be whether or not lawmakers in Washington will send the U.S. economy over the fiscal cliff. As you are no doubt aware by now, if our so-called leaders fail to act by Monday at midnight, then tax rates will rise on all Americans (analysts suggest this would be the biggest tax hike in history) and hundreds of billions of dollars in government spending cuts would automatically go into effect.
While there is still some hope that Congressional leaders and the White House will be able to strike a “grand bargain” which would solve the budget problem by raising taxes on the rich and reduce the government’s annual budget deficit (although it should be noted that no deal being discussed will actually eliminate the current $1.25 Trillion annual deficit), most of those in the know don’t think such a deal is possible at this stage.
The good news is that the President met Friday at 3:00 pm with the leaders of the House and Senate to talk about the fiscal cliff. The bad news is the best that can be hoped for at this stage of the game is some sort of “small deal” designed to kill the tax increases on 98% of Americans and stop the “sequester cuts” designed to go into effect on Tuesday of next week.
While this sounds like a good thing as taxes wouldn’t rise on most consumers, the bottom line is that a “small deal” simply sets us up for another budget battle at the end of February.
As Treasury Secretary Timothy Geithner has explained, the U.S. will hit the “debt ceiling” (the maximum amount of debt the government is allowed to incur, which is currently at just under $16.4 Trillion) at the start of the New Year. And while the government is NOT going to run out of money, shut down, or default on its bills next week, analysts expect that the debt ceiling will become a very real problem in either late February or early March.
So, any “deal” that gets cut to avoid the fiscal cliff between now and New Year’s Eve isn’t likely to mean much as the finger-pointing, mud-slinging, and name-calling will begin anew within 60 days.
The problem is that both sides are firmly entrenched in their views. Republicans believe that the government has a spending problem (ya think?) and that entitlement programs, which are slated to go bankrupt in the not-too distant future, along with the tax code need to be reformed. On the other side of the aisle, the Democrats continue to focus on taxing the rich, saying that Obama ran on this platform and won the election.
While I agree that Obama does indeed appear to now have a mandate to tax the rich, the key point is this alone doesn’t solve the problem. As has been stated time and again, the problem is that the “revenue” generated by such a plan to tax the wealthy simply isn’t enough to cover the overspending.
However, the game in Washington is all about making the other guy look bad. Forget about what’s right for the country, winning is all that matters in the beltway. And so it goes…. Republicans want to focus on spending and Democrats want to focus on raising taxes.
How Did We Get Here?
While the drama plays out in Washington (again), it is even more interesting to review how we got into this mess. Recall that this isn’t the first go-round in this fight. Back in July/August of 2011, the budget/debt ceiling debate raged. And since the two sides couldn’t come to an agreement, they set up a bi-partisan “supercommittee” to come up with a plan to cut a minimum of $4 trillion out of the budget over the next 10 years. The deal was that if the supercommittee failed to reach an agreement by the end of 2011, then the Bush tax cuts would expire and automatic spending cuts would go into effect on January 1, 2013.
So, in effect, Congress set up a “penalty” for not reaching an agreement (aka the “sequester”). But alas, the supercommittee failed, the country’s debt rating was cut by S&P as a result, and Congress has had more than a year to deal with what is now being referred to as the fiscal cliff.
This brings us back to Friday, December 28th. And what is it that is expected to come out of the current drama? Oh, that’s right, a “patch” to basically kill the “penalties” that were set up by Congress the last time around. So, in essence, there is no deal to fix the budget and no consequences for failing to do so – because you can always kick the can down the road.
So, from my perch, it appears that unless there is suddenly an urge to compromise, we can expect to see the “cliff” avoided and a new battle beginning in a month or so. And if history is any guide at all, this battle will likely include more of the same bipartisan grandstanding, more political posturing, more discussions of the U.S. defaulting on debts, more threats of the government not making social security payments, more talk of a government shut-down, and more downgrades of U.S. debt. Super.
But then again, this is what the public voted for in November.
Thought for the day…
Wanting to be someone you’re not is a waste of the person you are. -Kurt Cobain
Have a great day!
David Moenning is the founder and chief investment strategist for StateoftheMarkets.com, a website dedicated to investor education and portfolio analysis. Mr. Moenning is also President of Heritage Capital Management, a privately owned, investment management firm. Founded in 1989, Heritage is focuses on risk management and an “own the best and ignore the rest” equity selection strategy.
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Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.