THE COUNTDOWN

Many of the decisions I make apart from customary strategies to manage risk and expectations are to gain a view of the economy in order to remain confident in the event of unexpected outcomes. The fiscal cliff is seen as one such outcome, but as I've mentioned before, I don’t entirely agree with many prevailing assessments.

The Cliff

Basically the fiscal cliff will trigger the automatic implementation of higher personal income taxes, including taxes on dividend income and capital gains, estate taxes and broad cuts in discretionary spending, much aimed at the massive defense budget. And the expiration of all of the Bush tax cuts over all economic strata. Whew...get the picture?

The Economy

The economy is generally weak in part because of deleveraging and other ongoing efforts to improve household balance sheets. Will the fiscal cliff make things worse? It could, but I don’t see how the consumer will be compelled to change patterns. Simply put, if the consumer has disposable income, the economy will grow, if not, it won’t grow as fast. One can see why unemployment is so important to my analysis.

And much of the media is calling for a recession as the outcome arrived at through conventional wisdom. But as I've often said when it comes to forecasting recession “most forecasts are wrong, most of the time”. So if Congress doesn't act, everybody taking a collective breath will likely slow things down, as will the rippling effect of reckless fiscal behavior (remember the credit downgrade?). But how much is anybody’s guess, including my own.

The Debate

But as I've already stated I believe that Congress will act to avoid the Cliff for the simple reason that I see more agreement, coming from behind closed doors, than disagreement fed by whining and posturing in the press. For starters, there is growing acceptance of some tax increase. In fact most of Congress wants to broadly preserve the Bush tax cuts for the public; the sticking point is 250K. Both parties do not want the automatic spending cuts and across the board tax hikes. And both parties have a history of compromising in ways that elude the pubic, such as maybe the Payroll tax cuts going away, or maybe worse, going up to avoid larger cuts in entitlements. For the record, it’s been done before.

Our Strategy

Following the election the stock indexes declined, eventually recovering last week. Without going into the contribution of year end tax strategies the stock markets have shown resilience in spite of weaker growth indicators. I believe this resilience is again a strong indication that the forward view of equity prices should be positive. But being a believer in “buying low and selling high” I’m going to be a little more cautious for now using the strength to rebalance portfolios, if necessary, for the new year.

The fiscal drama that surrounds the debate is almost comical (almost) but the seriousness is not lost on the public who, if the news sources are any indication, are growing very weary of the process and its predictable posturing (I know I am). But ignoring the swagger, I still believe that something framed like compromise will occur, and more importantly I’m not sure it will require much compromise for the press and the public to put it to bed.