Elections have consequences and this one will have
consequences for what happens with the Fiscal Cliff. Wall Street immediately sold off after election results that looked like more of the
same gridlock but this election might actually have been a pretty good scenario
for avoiding the Fiscal Cliff. While the
Republicans maintained their majority in the House they lost seats and were
expecting a much better outcome across the board in many winnable elections. While the Democrats kept the White House and
the Senate, and picked up seats, this was far from a landslide or a mandate. In
their post election rhetoric both sides look willing to deal. Republicans seem to understand that some sort
of tax increase, no matter how it is ultimately packaged, is inevitable. Democrats seem to understand that they need
to compromise with the other side and may not get everything they want. What type of agreement we ultimately get is
anyone's guess, here are a couple of ideas:
1. No "tax increase" on the wealthy but a phasing
out of loopholes that is expected to generate somewhere near the same amount of
revenue. This would allow the
Republicans to stick to their no tax increase pledge while basically being the
same as a tax increase.
2. A smaller tax increase on the wealthy than the Democrats
want. This would allow Republicans to
say they held the line somewhat. This
could also be sweetened with some sort of agreement to tackle the tax code
and/or entitlements.
3. We could actually go off the Fiscal Cliff at year end,
then in January have a retro-active deal.
Any deal in January could be spun as a "tax cut" as rates
would have risen and a deal would bring them back down (even though they would
still be higher than December).
At the end of the day the stakes are too high and the public
has spoken. Both sides will figure out
some agreement that allows them to save face with their base and claim some
sort of victory. Whether this turns out
good for the economy longer term is anyone's guess. We still have a lot of problems that need
solving and it is doubtful they will be addressed.
Of course I could be wrong and there could be no agreement,
what happens then? That is the beauty of
being tactical. We don't move based on
predictions, we follow market trends. If
the Fiscal Cliff is not solved we will just move to Treasuries, Gold, bonds,
and/or cash and wait out the turmoil. If
it does get solved we will participate in any rally that ensues. Either way we are prepared.
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