A Non-partisan Look at the Fiscal Cliff
I can already hear my colleagues saying “non-partisan, yeah really?”
Maybe they are right, but you should wait until the end. Partisanship, like beauty, is in the eye of the beholder.
I believe that we can all agree that the initial introduction of the fiscal cliff represented an effort to address the significant spread between Federal spending and revenues and the issue of a debt ceiling. It is also clear that several years of large budget deficits have led to a material increase in the aggregate national debt. What to do? There are many proposals, generally along party lines. However, these proposals have, for the most part, been non-specific. There are 535 Senators and Representatives and they, like those who elected them, have a broad range of individual and collective thoughts when it comes to a balance between revenue and spending.
Think for a moment about credit cards. Most of us have one or more, but we tend to differ materially in how we use them. Some of us pay the balance in full at the end of the month, some of us pay the balance over a longer period but are generally responsible with respect to the outstanding balance, and some of us are bit more cavalier and only respond to significant pressure from the card issuer. When the head of the household gets the family together to point out that we are spending is too much, the speaker says “we” but means “the rest of you”.
Polls suggest that the electorate is concerned about the size of the national debt and the continuing significant annual deficits. However, those same polls also suggest that when it comes to specifics, the mood changes and cuts should only come from someone else. In other words, reduce the debt and deficits, tax someone else, maybe the very rich, and don’t reduce any of my benefits, particularly Medicare and social security.
As professional investors, acting on behalf of our clients, we have to take a realistic view and seriously consider what is actually likely to happen. I believe that there will be some very modest resolution of the immediate problem, generally referred to as the “fiscal cliff”. This resolution will probably provide face-saving talking points for both parties, paper over the real issues, and suggest that serious work will be undertaken in the future.
As paltry as this may seem, we can reasonably expect to experience numerous press conferences and hard line comments from various interested parties before anything is actually finalized. In the interim, markets are likely to be volatile. I believe that the long-term outlook for well-chosen equities remains excellent.
Politicians do not like to say “No”. They are much more enthusiastic about “Yes”. Actually doing something to increase revenues, as differentiated from a largely symbolic increase in tax rates, is not going to be a vote getter. Neither are serious cuts in popular programs.
All comments and suggestions are welcome
Walter J. Kirchberger, CFA