Cliff Dive

Here we are one day after Election Day, and we know who our President is going to be, which is a relief relative to the contested election of 2000 where we were counting “hanging chads” for weeks.

While scores of lawyers were at the ready on both sides to litigate the results of the election, the result was clear enough and for that we are grateful.

Which leaves us teetering at the edge of the dreaded “fiscal cliff”, where without some agreement between previously un-reconciled agendas, income taxes would automatically go higher for most Americans, while automatic budget cuts would go into effect, affecting everything from the military to needed social programs.  This would be a devastating blow for a fragile and slowly growing economy. The “cliff” has been in view ever since the “non-deal” last summer (2011) which resulted in the credit rating of the US being reduced from AAA. The fear of the fiscal cliff stems from the fact that the opposing parties were unable to reach a compromise deal then, despite full awareness of the ramifications.

We don’t, however, think that we will be hurtling off the cliff, for a number of reasons.

Clearly, the focus of the markets has been on quantitative easing efforts by the Fed and the ECB, and also to a degree on the US election results. The cliff is not new news but there has been a fear that some are too complacent regarding the probability of a deal now that the election is over. Alan Greenspan was on Bloomberg yesterday warning of this complacency. Now that the election is old news, the focus will be on the cliff and I believe that with all the attention and dire warnings, the parties will be compelled to agree on a deal. After all, neither side wants the tax hikes for middle income people that the cliff will bring (one side wants lower rates across the board, the other wants higher rates for just a few). No politician will “play chicken” with that kind of broadly punishing policy. The election is over now and the winner has stated that taxes would only go up on the top earners.

Secondly, the President stated in a televised debate watched by most of the country, that the automatic cuts, especially to military, would not occur. Most Presidents are driven in 2nd terms, in part, by their need to create a “legacy”. Letting us go over the cliff w cuts to military and social services is not the legacy any President is looking for.

Thirdly, there seems to be an opening here for a revival of Simpson Bowles, with an emphasis on targeted budget cuts and possibly tax reform. Given the election results, don’t look for lower rates across the board, but perhaps an attempt to keep rates low for the middle class and upper middle class in exchange for give-ups in tax deductions.

Finally, and I think most important, is that “timing is everything” with regard to political compromise. In the summer of 2011, Republicans were jockeying for position going into the presidential election and wanted to show their “toughness” regarding governing philosophy. Now the election is over and it’s time to do the work of the people, as the next elections are far off in the future. Therefore it is key that pressure be brought to bear on current pols to do the right thing and make a deal before they smell another election.

 We will of course be watching this closely, but don’t believe that portfolio changes are warranted simply due to the cliff.  

 

About Jim Jeffery, CFA

Jim Jeffery, the founder and principal of Jeffery Asset Management has joined Solaris Advisors LLC as Managing Director where he will lead the non profit senior living effort. Jim is a Chartered Financial Analyst (CFA) with more than 20 years experience in the financial services industry. Have a question about your financial plan? ASK JIM

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