11/5/2012 8:30 PM ET|
For economic clues, watch Congress
Tuesday's results will shape year-end battles and the road for investors in 2013. But the presidential race may be less important that what happens to the House and Senate.
On Wednesday morning, the global financial markets will breathe a big sigh of relief -- if the United States has actually elected a president.
Barack Obama? Mitt Romney? It doesn't matter from this perspective and in this time frame. It's good news if the election isn't headed to the Supreme Court or the House of Representatives. A clear-cut decision, accepted by all sides, is better by far than any of the frightening outcomes making the rounds of Wall Street trading desks in the days before the election.
Headlines about voter suppression in Florida and Ohio, and dirty tricks in Virginia and Pennsylvania, certainly make some on Wall Street worry that whoever wins, the other side won't accept the result. You think an election that sends Speaker of the House John Boehner of Ohio to the White House as president with Joe Biden as vice president would produce enough chaos to send the indexes tumbling? (It could happen, if a tie in the Electoral College sends the decision to the House.)
Yet if we get an unchallenged decision (no matter how much grumbling), we'd better enjoy that sigh of relief while it lasts. The campaign for 2016 starts almost immediately, with all the jockeying for advantage that goes with it. I'd give us 10 days, maybe two weeks, without campaigning.
And that, like it or not, will be the background as the politicians in Washington begin to confront the fiscal cliff of expiring tax cuts and mandatory budget cuts that threaten to end the current weak recovery and send the U.S. economy -- and much of the global economy -- back into recession.
For clues on how that longer battle will turn out, keep your eyes on Congress on Tuesday night.
Preparing for battles ahead
Will politicians try to use fiscal cliff to advance their own electoral agendas? You bet. Will politicians restrain their posturing out of a fear that they might talk the economy back into recession? Not a chance. Will politicians take the country close to the brink in order to extract maximum partisan benefit? Does the sun rise in the east? Will some politicians be willing to take the country over the cliff in order to win what they deem to be a long-term political advantage? Absolutely.
What you want to know as an investor isn't whether there will be politically motivated fiscal-cliff noise and chaos -- because, of course, there will be. What you'd like to know instead is how much noise and chaos to expect.
Are we looking at events that will form a worrisome background that might amplify fear in the market but won't necessarily make up a determining downward trend? Or are we looking at such loud and disruptive chaos that it will make every other trend in U.S. (and potentially other) financial markets secondary to relentless downward pressure?
I'll bet you'd like to know. I'd sure like to know. And I think I've come up with some clues for figuring out how deadly a witches' brew of U.S. politics and fiscal crisis we're likely to see in the coming months.
My basic advice is to pay more attention to the races for Congress, and especially the House of Representatives, than to the presidential results. What will really matter in the coming months is how much fear and triumphalism the elections produced among the Republican and Democratic members of Congress.
How they read the result will determine how they behave in the negotiations over the fiscal cliff -- so we investors had better spend a little time figuring how these politicians interpret Nov. 6.
Key to figuring that out is knowing not only who won and lost but also what their parties are likely to make of those victories and defeats. In the days after the elections, the parties will develop their own narratives to explain the results, and those narratives will go a long way to determining how the two parties will behave in the campaign for 2016 that starts all too soon.
First, the donkeys
Let's start with the Democratic side, since it's relatively simple.
If the Democrats lose the White House, they could well lose the Senate, too. If not, the Democratic Party in the Senate would be a shellshocked majority, unlikely, in my opinion to muster an effective filibuster strategy to stop a Republican White House and House. The question, as I note below, would be how far an ascendant Paul Ryan wing of the Republican Party would be able to push the Romney administration toward an economic policy of tax cuts and cuts to discretionary spending. (More on this later, I promise.)
But what if Obama wins re-election and the Democrats hold on to (and maybe even increase) their majority in the Senate while cutting a bit into the Republican majority in the House? Before the election, more-aggressive members of the Democratic majority in the Senate were floating a strategy that would send the country off the fiscal cliff temporarily in January by allowing the Bush tax cuts to expire. That would mean that, technically, a vote in January for the Obama plan to raise taxes on the 1% while cutting taxes for the middle class would be a vote for a tax cut rather than a vote for a tax increase.
On the other hand, a vote to raise taxes in December on the 1% would be a tax hike. So the theory of these Democrats was that this would let some Republicans who had taken the no-tax-increase pledge of Grover Norquist and his Americans for Tax Reform group vote for the Obama tax plan without breaking their pledge (and risking political suicide when Norquist went against them in the next Republican primary.) How many Republican votes this would allow the Democrats to peel away would depend on who had lost seats in the election among Republicans. (Again, more on that later.)
I'm pretty sure that Wall Street and the debt-rating companies would not be amused by even a temporary plunge off the fiscal cliff. The exact extent of the damage would depend on how much faith investors put in Democratic promises to stop the plunge in midair and then reverse it by making everything retroactive.
Among the elephants
A Republican victory that produced a Romney presidency, a reduced Democratic majority in the Senate and a continued Republican majority in the House would probably be seen by conservatives and Tea Party Republicans as a vindication of their move of the party to the right. Having run on (and survived) the Paul Ryan budget, a Romney administration would, in all probability, make that document its economic blueprint.
The effect on the fiscal cliff? Part of the cliff would vanish, since I think we can count on a Romney/Ryan administration to go whole-hog for renewing and extending the Bush tax cuts. On the spending side, however, I think a Romney administration would be inclined to drive straight off the cliff. The Republican Party is committed to cuts in discretionary spending -- even if it refused to spell them out in any detail during the campaign. The conservative/Tea Party wing of the party, which would in effect be the Republican Party after a victory in this election, would pursue its agenda of shrinking the size of the federal government by cutting spending.
What's up for grabs is the reaction of financial markets and debt-rating companies to this agenda. The Ryan wing of the party has been adamant in its belief that the numbers in its economic plan add up -- but they add up only if you accept the belief that cutting taxes and spending will accelerate the rate of economic growth by enough to increase government revenue despite the reduction in tax rates. That's the only way you can cut taxes by the amount that Romney and Ryan have proposed and also reduce the deficit.
The belief that government revenues will rise enough to cut the deficit even as tax rates are reduced -- what's called "dynamic scoring" -- isn't shared by all economists. My impression, in fact, is that there are relatively few believers in that scenario among economists on Wall Street and at Standard & Poor's, Moody's Investors Service and Fitch Ratings, which means that a pure Ryan-plan approach to the fiscal cliff could get major push-back from the financial markets. I don't know how a Republican plan to end the fiscal cliff that was given a less-than-passing grade by Wall Street and S&P nets out, but I'd be surprised if the ratings companies didn't at least warn of a potential downgrade of the U.S.'s AA credit rating.
This means there's a very real possibility of a collision between what I'll call Ryan Republicans and the credit-rating companies (and Wall Street), since the typical reaction by the Republican True Believers to criticism of dynamic scoring has been to ridicule the opposing viewpoint or simply ignore it (if they can't bury it, of course, as they tried to do with a recent Congressional Research Service report that concluded that income tax and capital gains tax cuts wouldn't increase growth as much as Republicans have maintained). The financial markets aren't likely to simply shrug off threats to the U.S. credit rating.
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We are awaiting impatiently the coming Fiscal Cliff confrontation with the President versus the House of Representatives. It’s imperative the rich pay a little more money to improve our economy, and to pay our Fiscal Debt. Fiscal changes our citizens want now to make America a better place to live, to pay our Nation Bills to correct the deficit! And then, of course! Mr.Obama, may needs to get ready to clip for last time, Mr.Boehner wings. We think, one way or another, Mr.Bohener, Ryan, Cantor will return to the old times tricks of bartering one goods for another, like many times before, but we aren’t going to be the losers this time, all that past abuse was very, very humiliating to our citizens, you, and all your followers Tea Party and Republican Members in the House, so much poor of conscience, and careless for the future of our country. You, and the full House members have obstructed the President too much, too many times, much too far! Mr.Bohener, keep playing hero, telling the president how to fix the Economy, listen, one more time it’s getting old, and we, all of us, millions of us, are awaiting impatiently for the fairness created by our president with this new Congress. We are here, all of us, late at night, awaiting in front of our TV sets, the final results of the efforts from yours/our president Obama, to dismantled the infernal machine of your House of Representatives budget locks, and cut your engines power, with all of you aboard members, all of yours live gifted millions of dollars provided by the sweat and work from our backs, in our great nation of purposely induced by you all, a systemic cruel land of hunger of the American people. You all Tea party and Republican members are the abusers, continuous negation to work for the people, by the people, and only for the people, and in 2014, we will let all of you feel the powerful winds of anger from all the guts of the millions American citizens that will not take it again from you, or anyone like you! We have too much hunger in our country, and you need to help now!
Wake up America!
It seems nothing has change, we just finish an election, and we have to listen to Ryan the liar advancing his wonderful ideas of how handle the coming Fiscal Cliff, this guy needs to realized, Mr.Obama is President. We just herd Mr.Boehner give his talk a few days ago about the Fiscal Cliff, and other economic situations he thinks he has the answer how to it fix, as usual! The things he said that infuriated many of us much was his statement that he wishes the elections had turned out another way, we thought it was an improper remark for the Speaker of the House to make, indicating one more time his personal feelings rather than showing a professional dedication to his job, lacking the vision to work fruitfully for the citizens of the USA. He’s contending us one more time in his own personal hypocritical super bully hero attitude! He has a recurrent amnesia problem like Mr. Romney had, and seems to be having troubles learning, and accepting from the American people the facts after the election. Sir, Mr.Boehner? Are you there in the House of Representatives? We just elected Mr. Obama as your President for another four years. We all truly hope you and your followers not trying to perpetuate the same old anxious lyrics coming from the mindless abusive House of Representatives, following yours and theirs perpetual intransigency and mental aberration in insisting in no tax increase for the rich, and emphatically suggesting cutting the entitlements programs. Your wrong ideology shows all of you wanting to sink our old citizens deeper in a hole of hunger, and miser their health care. Come to your senses, all of people in Medicare have earned their Medicare after years of dutiful work, but remember as you try your dirty tricks on them one more time, as you all well known for a long time, the SS is not a part in any of these talks, so make sure not to monkey with it! Keep holding back America, and fighting for the very rich, while 46 million Americans are in poverty, and I promise, we will never ever forget all of you in the House of Representatives. Be smart, work for the people that have waited over four years to overcome your permanent intransigency in helping the American people, we put you there; it’s your responsibility to the people!
Has anyone thought how bad off we are economically when politics have become so important to our economic future? This is not normal folks! This is totally backwards, when you think about it.
IMHO, to paraphrase General Sherman "Politics is all crap." Doesn't matter which side you're on.
When Obama care goes into effect and increases my company's premimums, we will institute for the first time a weekly co-payment for medical insurance. I figure 20% for an individual and 50% for a family. Up to now we (the employer) pay 100% of everyones medical insurance
Understand that stuff flows down hill.
Of course the children who voted the pied piper into office yesturday would never understand that us employers will not absorb these increased costs.
I also could drop coverage and simply pay the $2,000 fine for each person, it is less money to dump the people into the crapy insurance exchanges.
Vote NO to ALL GNOP obstructionists on the ballot today! Don't let the GNOP ever hold this country hostage again like they did for POLITICAL GAIN while MILLIONS of families lost their jobs, homes, and retirement accounts.
Don't forget how the GNOP PLACED POLITICAL GAIN ABOVE THEIR OATH TO SERVE when American Families NEEDED HELP THE MOST!!
romney considers a woman who has 2 jobs supporting her 2 kids getting very little help off the system to get bye living off the system and he gots all u believeing everyone dont work sept the rich ....
understand one thing term limits wont do nothing they can retire in 4 years 100% full benefits and medical why would u want even more of them crooks collecting a nice pension just vote them out every term so they cant collect that sweet pension !!!!!
Has Hussane ever had an employee? Has Hussane ever had to meet a payroll each week to stay in business? Has Husane ever borrowed a million dollars and had a mortgage to meet each month in order to hope to be successful in the business world? Was Hussane educated on the public nickel?
And, has his running mate Biden ever had an employee? NO !!! The only employees either one of them ever had the tapyers footed the bill. Biden has been on the public nipple for 50 years in washington.
Yet, we hird them to run the country. Sad, but true. I heard reecently, if you think Greece is in bad shape, if you think Italy is in bad shape, you ain't seen nothing yet!!!
I think all people should have food to eat, I think all people should have a roof over their heads, HWEVER, a few people have never wanted a job, never paid a dime income tax to support our way of life, always been on the public nipple, yet they can vote themselves a raise.
You cant increase wealth by deviding it.
Did you ever see someone that has never wanted a job, provide a job for employees????
The Democrats have really become the "Party of No" as some once referred to the Republicans. When Obama was elected the Democrats had control of both houses of Congress, yet what did they accomplish? Instituting socialized medicine (Obamacare), passing stimulus measures, and increasing the national debt at a pace of $1 trillion per year. Since 2010 when the Republicans gained the majority in the House, they have passed many bills that have been sent to the Senate and been ignored. What has the Democrat/Harry Reid controlled Senate done in the past 2 years, much less since Obama's election? Seriously. The absence of leadership, refusal to act, and total lack of direction displayed by the Democrats is inexplicable. Whether or not Obama is reelected, at least we can hopefully get a Republican majority in the Senate as well so they can begin working with the House again to pass legislation and do the people's business.
I don't trust either political party, and would rather have divided government, over a clear majority for either side. For this reason my vote went Republican in the Senate (anti-incumbent) and Democrat in the House (also anti-incumbent). I don't trust either of them to be anything but self serving, and corrupt in "service" to their respective lobbyists and PACs who have bought them off. To basically screw the people and the nation as a whole if it's in their own self interest, or the interest of their lobbying handlers.
Not that they'll read it that way, but my vote in Congress was against both sides, nor do I support either partisan agenda in this....
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