Hardly a day goes by that we don’t get a phone call from someone about the “fiscal cliff”…you know, that period of time beginning January 1 when all the Bush tax cuts expire. None of the calls are from someone trying to reassure us that everything is going to be OK. All of the calls are from someone hoping we can reassure him/her that everything is going to be OK.
Different callers have different fears about the fiscal cliff, but the majority of them seem to be centered on the fact that it is called a “cliff.” There is not much about the word cliff that gives us comfort. Most of us, when we visualize a cliff, we typically see ourselves either at the top (alive) or at the bottom (not alive). Usually there is very little in between…except that visual of you bouncing off the side of the rocks as you plummet to the bottom and arrive in the “not alive” state.
I think that is the general problem associated with the media coverage of this current political debate. They are having way too much fun with the word cliff. The powers that be didn’t choose to refer to it as a “fiscal waterfall” or a “fiscal slope” where you could see yourself arriving at the bottom a little frazzled, but healthy and alive nevertheless.
The clear message is that if we, as a country, go over the fiscal cliff, we are dead…but not immediately. After bouncing off the rocks (higher tax rates), we will lay at the bottom in severe pain (the resulting recession due to higher tax rates) for a while before taking our last breath (the recession turning into a depression). The message is that it is going to be a brutal and painful financial death.
Meanwhile, President Obama (on one side) and the House Republicans (on the other side) are not giving us any indication that they are going to solve the problem prior to December 31…that, whatever it is that we are about to plummet over, they are not doing what is needed to prevent our demise. Obama, emboldened from his victory in the presidential election, has made it clear that there will be no deal that does not involve higher tax rates for the “top 2%” – and the Republicans’ initial proposals, of course, do not involve higher taxes for anyone.
Both sides are starting negotiations as far from an agreement as possible, neither side wants to appear to give, and each side apparently operating under the “first one to blink loses” theory.
All this posturing is getting wearisome to the American public. We all know how this is going to end.
- Marginal tax rates for high wage earners will increase.
- Taxes on dividends will increase.
- Taxes on capital gains will increase.
- Some spending cuts will be agreed upon, mostly to do with Medicare and/or Social Security.
Get it over with already. Sometimes it just seems that there is a bit too much testosterone involved.
If they don’t come to some sort of agreement by December 31, it is NOT necessarily financial Armageddon. They can still come to some sort of an agreement in early 2013 which would no doubt be retro-active to January 1.
Let’s assume for a minute, however, they don’t ever reach an agreement – that both sides stubbornly remain resolute in their convictions. That doesn’t mean the U.S. economy comes to a screeching halt and we crash through the financial windshield. That doesn’t mean we immediately plummet into a recession. And it doesn’t mean the stock market immediately loses significant value.
Quite frankly, I don’t think anyone (including me) knows exactly what it does mean, although there are no shortage of pundits on television who claim to know what will occur if Congress and the White House cannot agree. My guess? It’s not going to be nearly as bad as we are being led to believe.
If there is no agreement, we revert to the higher tax rates prior to the Bush tax cuts. It’s not likely to happen but if it does, it won’t be the equivalent of falling off a cliff…maybe more like jumping off the roof of your garage.
When there is an agreement (which I think will eventually occur…because it has to), I think that removes another uncertainty that has been hovering over our economy for the past year. Economic problems in Europe have not been solved but they have been postponed and no longer seem to be imminent and uncertain threats. The presidential election is no longer an uncertainty. Repeal of Obamacare is no longer an uncertainty (it is here to stay). The last remaining current uncertainty is the “Fiscal Waterfall” which may turn out to be more like Y2K…a big non-event.
Stock markets like certainty. Stock markets don’t like uncertainty.
The members of the Bakery, Confectionery Tobacco and Grain Millers Union (BCTGM) elected to go on strike November 9, effectively eliminating their own jobs. The BCTGM Union members were employees of Hostess Brands which, when faced with the strike by employees, decided to close its doors and terminate the employment of the 18,500 workers responsible for making Twinkies, Ho-Hos and Ding-Dongs. I’m guessing that wasn’t the outcome the union expected when it decided to strike.
Why do I mention this? Since the Federal Reserve started printing a significant amount of money in 2008, predictions of massive hyper-inflation have been as common as bad financial advice. And yet we haven’t seen runaway inflation (yet)…and we have watched interest rates decline. One typical indicator that inflation is taking hold in an economy is that the cost of labor increases. As manufacturers increase prices to customers, workers typically demand increases in pay and benefits. The BCTGM Union is just one more example that the cost of labor in the United States is remaining under control (or declining).
Having said that, it was announced Friday that the unemployment rate declined to 7.7%. A large part of the decline was due to people who have stopped looking for work, not because they found a job.
The U.S. stock markets ticked up slightly in November…just about 0.5%. That’s just under 15% for the first eleven months of 2012. The EAFE Index (Europe, Australia and the Far East) was up almost 2.5% in November and has increased about the same as U.S. stocks for 2012. Even though it has been a decent year for U.S. and foreign stocks, we don’t feel stocks are horribly expensive and see some additional upside once the uncertainties are removed…particularly in foreign stocks that got blistered the past few years.
At Boyer & Corporon Wealth Management, we are slightly increasing our equity positions in anticipation of a period with relatively minimal uncertainties.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.