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While the European debt crisis garners most of the attention, the political mess in Washington...
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Friday, June 8, 2012, 7:36 PM ETWhile the European debt crisis garners most of the attention, the political mess in Washington and looming "fiscal cliff" at year-end may actually pose a bigger danger to the markets. Trillions of dollars in automatic tax increases and spending cuts are on the horizon, but it's barely registering with investors. "It is unlikely that the cliff is fully priced into the markets," says BofA Merrill Lynch economist Ethan Harris. We're only beginning to grasp the size and timing of the coming shock to the economy.
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This news story has 18 comments:
There's always something to worry about. Never, ever a single moment when some fear cannot be conjured up that will "destroy" markets. For many, fear is paralyzing, and not very profitable either.
“Perfectly stated”
Not a day goes by without pundits exclaiming the next deadly scenario at 100 decibels. Not even enough time to address one crisis before extolling the next.
While I don't like to place any faith in Washington when it comes to handicapping investments, my inclination is to believe that it is unlikely that Congress and the President's answer to the looming debt cliff will be a zero policy response.
This would be for the simple reason as their underlying objective is linear: get re-elected.
It's not in their self-interest to all sit in the toilet together and choose to pull the lever in November.
Generally, I agree with you but I wonder how many individuals who are sitting on long term gains in any asset class are thinking about dumping them and taking advantage of the current tax rates rather than paying at the inflated rates that are coming without some type of agreement between the parties?
At the end of the day there is indeed risk and having an opinion on what may or may not happen vis a vis the so-called 'fiscal cliff' will inform investment decisions that will indeed impact markets.
We needn't leave your question as rhetorical. Conveniently, if you may recall, we've been through precisely this same exercise once before in 2010, so there's some empirical evidence for how the market might behave, if people sold in fear of non-extension of the cuts.
In 2010, from an August 26th SPX trough at 1047, until the near-last-minute passage and signing of the 2010 tax extensions on Decemeber 17th, the SPX rose steadily to 1244, for a net gain of 18.8%.
Clearly, if an extension were to fail passage, we'd see a sizable market meltdown, but it's not at all evident that such will occur in anticipation.
Hopefully, this is exaggeration, chicken little.
"everything is fine" wouldn't make page 12 in the news
The problem is that consumer sentiment has a major role in the economy, and the media keeps hammering at this. As long as we give these nothings their ratings, the economy and markets will look like they do.
Obama continually gets hammered as a liberal spending us into oblivion. Now that under his watch potentially spending is coming down and revenues are going up, thus at least constraining the deficit, he doesn't get any credit but instead it's portrayed as another disaster on the horizon.
I disagree on the political suicide angle. Obama will play of the republicans as problematic financial stewards starting with the following:
"...But Republicans who helped create it as a bludgeon to force a bipartisan budget accord are now desperate to undo it. Indeed, some of the loudest advocates for blocking the cuts — like Representative Howard P. McKeon of California, chairman of the House Armed Services Committee, and Senator John McCain of Arizona, the ranking Republican on the Senate Armed Services Committee — voted to create them; 28 Senate Republicans and 174 House Republicans voted for the Budget Control Act, overwhelming the opposition. "
What further demonstrates the obtuseness of the BoA comment is the total lack of any discussion involving going short or long defense stocks and the defense supply chain.
So now we are to assume that our illustrious President Obama in spite of our slowing economy, in spite of growing opposition from both sides of the aisle as well as Bernanke, the CBO and many others of high regard Obama will allow the Bush Tax cuts to lapse which for all intents and purposes will complexly derail our economy and throw it back into a deep recession if not depression.
Yep, sounds plausible to me, but will America let him?
I remain optimistic that some sanity will prevail in the end because, as you said elsewhere, politicians generally like to be re-elected. However, for those with need to worry, here's an illumination of present scenarios that might give one something to ponder:
#1:
Between now and election no action can or will be taken because the Republicans in the House will not provide aid to Obama. End of story.
#2:
Obama wins election; Tax cut extensions might, effectively, be dead because Obama's socialist ideology would trump all, even a compliant Congress. And, would the Senate go along, in any event? It would be most interesting to see if Obama, with no need for re-election, would become dictatorial in his socialist views, or would be concerned about his "legacy."
#3 Romney wins election. The extensions would live or die, depending on the Senate. On the one hand, every senator would worry about getting re-elected if they let the extensions expire. On the other hand, they'd be presenting Romney with his first big victory, even before he took office.
A further wild card is presented by how the Senate elections work out. Most ironically, the extensions might stand a better chance of passage with Democrats holding their seats than with Republicans replacing them. Why? Because the vote would have to occur while the lame-duck Congress was still seated, so if the senators knew they had further life after January, they might be inclined to be pragmatic, vote for extension and not anger voters/taxpayers. If the Democrats had lost and were about to be unseated in January, they'd have no incentive to play nice, either for themselves or for Romney.
Does anyone really believe this economy is going to collapse, or that it is really President Obamas fault?
This orchestration of calamity is no more than fear mongering, rhetorical political positioning, media drama, and bullshit!
I have never heard or seen so much crying since Obama was elected. The naysayers stomp, cry, and scream the sky is falling without taking a breath! The just say no obsession has produced nothing but negative emotion and outcome. Obama this, Obama that, Bush this, Bush that, now the Republican party is stuck with Romney because they couldn’t dig up anything better, just like the Democrats did with Carey against Bush. Boy, what winners we have there. Just because a person ran a business well does not mean he can run a country. I think most people are surprised at the good, yes I said “good” Obama has done, but no credit will be given because that would mean not being “negative”. I really don’t care who you vote for, I’m just sick of hearing all the crying and negativity!
What do you think our illustrious senators & congressmen are doing with all this negative information “they” are slinging out there? They are betting against you & me that’s what!
These last minute deals are constructed and calculated to the very last minute and dollar!
Keep In mind, they invest too and are making a fortune playing your emotions like a puppet.
They preach doom & gloom until the last minute and the talking head media vampires suck it up and spit it into our faces. People are made to look like fools and that makes them even more upset and confused, however the boys that were elected on “both sides of the aisle” are laughing all the way to the bank (off camera of course).
They invested in the down market, and all of a sudden things turned positive, until they cashed their checks that is!
No one or two term President is going to fix our country, it took a whole lot of them to get us into this position and it will take positive action to get us out back on track. A negative political party crying and beating their chest for the camera will not accomplish anything.
My suggestion is to stay positive, invest wisely, and use good conscience in all matters. I wish you all good luck, no matter what your party.