Fiscal cliff or follies?

The elections are over, but not the political posturing. There is talk about compromise, while all those involved are digging their heels in at the same time.


Discussions are taking place this week between labor, business leaders, and the powers that be in D.C. regarding this issue. The participants include members of the Campaign to Fix the Debt, a group founded by Alan Simpson and Erskine Bowles that has pushed for a long-term plan to fix the nation's debt and deficits. Simpson, a former Wyoming senator, and Bowles, a former White House chief of staff, served as co-chairs of the President's bipartisan National Commission on Fiscal Responsibility and Reform, which proposed $3 in spending cuts for every $1 in additional revenues.


Many business leaders have raised concerns and actually announced planned layoffs if the fiscal cliff actually occurs and the automatic tax increases and spending cuts take effect on January 1, 2013. The following is a description from the non-partisan Congressional Budget Office of what the fiscal cliff entails, which is basically $1 of spending cuts and $4 dollars of tax increases. It should be noted that these tax increases would impact the vast majority American taxpayers.


As I've noted in prior commentaries, and what I continue to hear from various analysts and pundits, there is literally mountains of cash on the sidelines waiting for a resolution and some sanity from D.C.. In the mean time, investors are reacting negatively to the political posturing, which is resulting in the recent drops in the stock market.


The consensus is that there will be some sort of compromise, but that it may not bring true fiscal reform, at least in the near term. However, if the reforms are somewhat reasonable and practical, then consumers, business owners, leaders and investors will feel much more confident and let go of  some of their cash, providing a huge boost for jobs, the economy and stock prices


It may seem like I am rehashing the same theme, but this is a very important issue in the near and long-term. Numerous institutional investors, mutual fund managers, CEOs, economists and others have stated what a profoundly positive impact true tax and spending reform would have on the U.S. economy. But for this to be accomplished, all involved will need to realize that nothing is sacred from fiscal scrutiny.


Otherwise, the fiscal cliff will become a reality.  Then the immediate negative economic impact of the automatic spending cuts (sequester) and tax increases will be a true wake up call for the American people. I'd be surprised if the cliff occurs, but if it does, I believe the outcry from Main Street to Wall Street would be loud. So loud, that the politicians would work feverishly to find solutions. Once those solutions are implemented, then we'd hear a huge sigh of relief from Americans and most likely see a rebound in the economy and stock market as previously noted.


None in D.C. wants their legacy to be "the fiscal cliff." Thus, it may get ugly with a lot of posturing, name calling and finger pointing, but at the end of the day, I believe a solution will be reached.  


Honestly, the fiscal cliff does not scare me. What scares me is the "kick the can down the road" mentality that is pervasive in D.C. If our debt issue is not addressed, and the Federal Reserve continues to print more and more money, our dollar will dramatically decrease in value. As this occurs, the U.S. government's debt rating will be downgraded and over time to possibly the same rating as junk bonds. Along the way, we'll see interest rates will skyrocket, and the only solutions from D.C. will be dramatic and painful for all Americans. I don't like seeing what's occurring in Europe; high unemployment, strikes, riots and a general decline in individual's personal finances and standard of living and don't want it occurring in the U.S.


The odds favor some sort of resolution to the fiscal cliff in the upcoming weeks or months. As such, I am not inclined to radically change your portfolios. History has shown that policy changes and rhetoric from Washington are much more of a distraction than a determination of what the stock market and economy will do going forward. Bottom line, there are a myriad of reasons for hope and the following section is just one.


The U.S., energy independence, and the possibility of an economic boom!


The International Energy Agency (IEA) reported this week that it forecasts the United States will overtake Saudi Arabia and Russia as the world's top oil producer by 2017. In addition, it noted that the U.S. could become a net oil exporter by around 2030 and almost self-sufficient in energy by 2035. In addition, the IEA believes the United States will overtake Russia as the biggest natural gas producer by a significant margin by 2015


This could have significant geopolitical implications, if Washington feels its strategic interests are no longer as embedded in the Middle East and other volatile oil producing regions. Also, a rise of 1.8 billion in the world's population to 8.6 billion would lead to a spike in global oil demand by more than 10 %, keeping pressure on oil prices, the IEA said.


More stable or even lower energy prices are a boon for consumers and businesses. Consumers may save money at the pump and on their utilities. Businesses, especially manufacturing firms, may see lower utility and transportation costs, making their products more competitively priced on the world market. Along this line, global companies may consider opening factories, transferring production and jobs to the U.S. if they see it as more stable and cost beneficial for them.


The IAE also announced that by 2035, the number of vehicles on the road worldwide will double to 1.7 billion. The majority of the growth will come from emerging markets, and China gets the most attention, but India will also see explosive growth as well.


As a result, it becomes very clear why every automaker has made growing in China a top priority. It has already passed the U.S. to become the number one auto market in the world. It won't be long until it dwarfs the U.S.


Thus, continued technological advancements and lower energy costs can result in lower manufacturing costs, giving U.S. some advantage in grabbing market share in the global car market, which would be the best economic stimulation imaginable for the U.S. economy and investors.




"There is a great difference between worry and concern. A worried person sees a problem, and a concerned person solves a problem."

                        Harold Stephens


"Second chances come along all the time. It's up to us to recognize them."

                        Katherine Russell Rich


"It's not your blue blood, your pedigree, or your college degree. It's what you do with your life that counts."

                        MIllard Fuller


Tony Moeller, CPA


The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.


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