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.
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