President Obama took center stage for his State of the Union address on Tuesday night. He came out with the charisma and "we can do this" spirit that captivated America in 2008. Before the joint session of Congress, he outlined proposals ranging from war spending, to taxes, to regulation, to energy, to jobs. Although he outlined some specifics, he kept to his usual ways of providing concepts instead of finite action. He spoke in generalities about the parallels between the economic boom after World War II and that of today. Many have not seen his winning spirit lately, but in the narrowing months to the election, he is coming at the issues with full force.
The President touched on many issues that will impact America's economy and thus indirectly impact all of our portfolios. In many ways, what Obama did not say is as important as what he did. The unknown is what brings fear to the markets and there is a substantial amount of uncertainty within the message he put forth. Though the market keeps climbing into the 1st quarter, Obama's words have the ability to change the landscape of our economy when the bills he has proposed reach the floor of Congress.
How will these hopes of Obama impact your money in 2012 and beyond?
Taxes: One of the most heated moments in the address was when he spoke of tax increases for the wealthy and ending tax breaks for large corporations. President Obama did not come out and explicitly say he was raising taxes on corporations, but if you read between the lines, he is implementing tax increases for companies that outsource jobs. This applies to our leading companies: Apple (AAPL), Cisco (CSCO), Hewlett-Packard (HPQ), and many others that all fall under the scrutiny the President is speaking of.
On the personal side of taxes, he is proposing both a minimum tax for millionaires and a restructuring of the existing tax-code. These tax increases will not sit well for the markets and especially large corporations. The short-term cost of Obama's hope to make America self-reliant again will be driving companies even further away from America. Further gridlock in Washington will ensue.
Regulation: The funniest moment in Obama's address was when he spoke of old regulations that need to be eliminated. He received a brief chuckle out of his stiff audience when he said:
I've ordered every federal agency to eliminate rules that don't make sense. … We got rid of one rule from 40 years ago that could have forced some dairy farmers to spend $10,000 a year proving that they could contain a spill - because milk was somehow classified as an oil. With a rule like that, I guess it was worth crying over spilled milk.
Although this statement may be funny, what is not are the further regulations Obama and congressional Democrats want to infringe upon corporations and industry. Although he may be taking away regulations on milk farming, he wants to put forth regulations on oil and large US industry. The regulations themselves are not what are so frightening, it is the fact that little to no information is provided on what they will entail and how they will affect American companies. No one knows what the "Finance Crime Agency" will do, or how the "Trade Enforcement Unit" will impact our imports and exports with China and India. Everyday investors will become weary of the equity markets when these bills come to fruition. Look to our past and what uncertainty has bread.
The $15.23 trillion national debt 'is going to consume us,' he warned. 'As bad as we think it is today, it gets significantly worse over the next 10 years as the baby boomer generation retires...That's the biggest thing the business world needs to see addressed or it will kill GDP results.'
This speaks to how America's debt crisis can affect everyday businesses and our nations markets, bond and equity markets alike. Although Obama wants to fight for lowering our nation's level of debt, he is not setting forth any specific plans for how he wants to do so. This is an issue of specifics again. There are no signs of Obama backing down from his demand for infrastructure investments and there are no signs of Republicans backing down from their fight of high taxes. This disparity will cause another layer of complexity to third quarter 2012 when these issues will be forced to come across the floor of Congress.
Jobs: President Obama touted his employment record of making three million jobs in America since he took office. Though this is impressive, his plans moving forward do not specifically tackle how 8.5% of America will be put back to work. Investing in alternative energy and building roads and bridges are not going to bring back long-term stability in the jobs market. The President spoke of how companies want to bring jobs back to America because there are twice as many positions as workers in technology.
The issue rests on America no longer being equipped to "create middle-class jobs" says Jared Bernstein, economic advisor to the White House. He speaks to how America is unable to compete with the "speed and flexibility" of Chinese factories. This is a systemic crisis that will cause perpetual economic uncertainty. In order for stable long-term jobs to be created, America will need to let the free market function - something Obama is not willing to do.
Uncertainty in Washington: President Obama made a point to sympathize with Americans who are fed up with the political rhetoric in the capital. Forbes reported that:
Obama did not offer a laundry list of legislative proposals, but instead acknowledged voter disgust with Washington, saying: 'I bet most Americans are thinking the same thing right now: Nothing will get done this year, or next year, or maybe even the year after that, because Washington is broken. Can you blame them for feeling a little cynical?'… The words were directed at Republicans and set the table for what Obama hopes will be a win-win scenario for him. If you block every proposal, especially those the two parties have agreed on in the past, I will campaign against a do-nothing Congress.
By making these types of appeals to everyday American's he is augmenting his relatability to the voting population, but he is not answering the question of how this will be accomplished. Before Washington are three key issues (aforementioned) that will threaten to divide the country even further and potentially shut down our nation until matters are sorted through.
Republicans will not budge on spending and Democrats will not budge on revenue increases from the wealthy. These fundamental differences go beyond politics and extend into ideology. The problem is that by politicians (Obama included) not being able to sort of their differences, they are leaving America in a place of true uncertainty. This is a risk that government cannot take because if markets do not have tangible evidence for the future, they will assume the worst. This will take a dent out of all our portfolios.
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In the end, these proposals will further divide Republicans from Democrats, Washington from the rest of the nation, corporations from America, and America from stability. It is not that Obama does not have solid ideas; rather it is that our government is unable to act as one and make decisions that will put forth certainty in the markets and jobs in the hands of Americans. Obama's reelection odds are directly tied to S&P performance (see above chart).
Although the market has been able to forget about our debt, jobs, regulation, and tax issues, later this year the time will come when these problems will no longer be avoidable. There is no safe place to invest to avoid the future, but America needs to wake up and put political ideology to the side to avert another crisis of confidence and mounting debt. America will get through this crisis, just don't believe that the bulls will keep raging all year long.