Intrade today was taking bets at odds of 1-to-2 that Barack Obama will be relected as president of the United States. Odds of 1-to-2 means you have to bet $1 to win 50 cents. To me, that means if Obama wins, as seems likely, I need to start selling my big winners.
By the way, Intrade also is quoting even more certain odds that the Republicans will keep control of the House and the ditto the Democrats with the Senate. In other words, gridlock will be here for at least two more years, so do not expect any major initiatives absent the miraculous.
That brings up what an Obama re-election means for the so-called fiscal cliff. The fiscal Cliff is, in essence, the result of a law requiring $560 billion combined in government spending cuts and higher taxes that will reduce a $1.1 trillion budget deficit by half. To me, if Obama wins, I cannot imagine that there will not be very many (if any) spending cuts anytime soon.
A Google search says that this year’s presidential and congressional campaign spending will total around $6 billion, with most of that coming from the special interest groups that benefit the most from government largesse. Do you think that those who put up the $6 billion will allow the government to cut spending? Maybe growth in spending could be cut, but certainly not current spending.
That leaves higher taxes. The special interest groups promoting lower taxes would seem to be in less favor with the Obama administration then those special interests that support more government. That is why I expect higher taxes by at least $200 billion annualized this year-end. I think it is certain that the 2% payroll tax will be repealed, equal to about $120 billion in higher taxes and at least an $80 billion increase in dividend and capital gains taxes.
Currently, after-tax wages and salaries are growing by about $200 billion annualized unadjusted for inflation. If payroll and capital taxes grow by $200 billion, that leaves a no-growth economy. Given the slowdown in Europe and the emerging world, a flat U.S. would accentuate the global weakness, probably sending the U.S. into a downturn.
In addition to the impact of higher taxes on the economy, stocks will also be hurt. On the one hand, the Federal Reserve wants to boost stock prices to create a wealth effect that boosts the economy. On the other hand, the Obama administration currently plans to raise dividend and capital gains taxes, which will depress stock prices and make for a negative wealth effect.
Of course, Obama could throw us a curve and push for lower taxes for all making under $250,000, but even then the odds of no increase in dividends and capital gains taxes would seem to be very slim. Therefore, stocks with lots of built-in gains should sell off as we got closer to year-end. To me, that means the big tech winners -- such as Apple (AAPL), Amazon (AMZN), Google (GOOG), and eBay (EBAY), could sell off through year-end.
Personally, I have already started taking profits on my big winners now, expecting the year-end sell-off. Of course, all of the above assumes an Obama victory and that his administration will not change its tax policy.