Over the Fiscal Cliff…

A few things to note about the fiscal cliff…. and my thoughts in general.

  1. Obama is flexing as he is in a better bargaining position now with a fairly convincing election win, and now in his final term.
  2. The fiscal cliff is not binary.  There is no all or none.  The ongoing debate will see some kind of compromise to deal with the $600 billion of legislated tax cuts that are set to expire and spending cuts that take effect in January 2013.
  3. The fiscal cliff, in some respects, can be viewed positively.  While there is a fear that GDP will shrink in the US due to the impact of the increased taxes and reduced spending the $600 billion represents over 50% of the 2012 US fiscal deficit.
  4. The World will not change in January, but the repealed payroll tax cuts and reduced spending will be a slow grind on the US economy.  With broad expectations of 2-3% growth in 2013 the expected 5% impact will lead the economy into a recession.

While volatility will remain in stock and bond markets in the next few weeks, and while we will potentially ‘go over’ the cliff – it likely won’t last for long.  A potential sell-off in markets could be a buying opportunity to buy quality companies.

There is too much at stake for the US to risk their economic recovery on politics and there is too much risk for politicians to stand in the way of a deal if – unlike Obama – they want and expect to be re-elected.  Rumours from the Republican camp is that they’re willing to relent on their adversity to tax increases to high net worth Americans, and Boehner has suggested his entire team in the House not make plans for Christmas.

Democrats and Republics making substantial progress before the New Year may need a miracle, however ’tis the season!

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