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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And what happens if Republicans lose the White House, fail to make any progress in taking back the Senate and see their majority erode in the House of Representatives?
I can see two potential narratives.
First, the conservative/Tea Party wing blames the defeat on Romney's lack of seriously conservative credentials. The solution to defeat, then, is to move the party further to the right. In the context of the fiscal cliff, that would mean the party would dig in its heels on spending and tax cuts. Some in the conservative/Tea Party wing believe so strongly that the future of the Republic hinges on cutting taxes and spending, and on reducing the size of the federal government, that they would be willing to pull a "Thelma and Louise," and drive off a cliff rather than compromise.
Second, the more pragmatic wing of the Republican Party -- which has been shrinking in size and influence in the past two election cycles -- blames the conservative/Tea Party wing for the Republican defeat on Tuesday. In this narrative, the extremism of conservative/Tea Party wing candidates alienated independent voters, and, despite Romney's efforts to run back toward the center in the campaign's closing days, cost Republicans the election.
Tasting the tea
I'd expect a tough battle between these two narratives if Republicans lose. The winning side will likely depend on which Republican candidates win and lose on Tuesday.
Conservative/Tea Party Republicans would argue that losses by Senate candidates such as Richard Mourdock in Indiana and incumbent Todd Akin in Missouri were due to extreme positions and verbal ineptitude more than to the candidates' fiscal policies. That argument gets harder to make if Republicans lose in Virginia, Montana, North Dakota and Wisconsin, but I'd expect that conservative/Tea Party Republicans will spin a narrative that says candidates such as Tommy Thompson of Wisconsin lost because they were insufficiently conservative.
That narrative will get harder to sustain if clearly conservative/Tea Party incumbents lose their races in the House of Representatives -- or if conservative/Tea Party stalwarts shakily survive surprisingly tough challenges.
Races to watch to see if candidates with conservative/Tea Party credentials lose and weaken the "We weren't conservative enough" narrative: Arizona's 9th District, where Democrat Kyrsten Sinema faces Vernon Parker; California's 3rd District, where incumbent Democrat John Garamendi faces a challenge from Kim Vann in a redrawn district; California's 9th District, where incumbent Democrat Jerry McNerney faces off against Ricky Gill; Connecticut's 5th District, where Democrat Elizabeth Esty faces Andrew Roraback; Michigan's 1st District, where Tea Party favorite Dan Benishek's opponent, Gary McDowell, has tied him to Ryan's Medicare plans; and New York's 24th District, where Ann Marie Buerkle, a Tea Party Republican, faces a rematch with Dan Maffei. Parker, Vann, Gill and Roraback are all recruits of the "Young Gun" program designed to boost young conservatives to victory in House races.
Races to watch to see if they're close enough to scare conservative/Tea Party Republicans: Michelle Bachmann in Minnesota's 6th District, Allen West in Florida's 18th District, Steve King in Iowa's 4th District and Roscoe Bartlett in Maryland's 6th District.
To the winner goes the narrative
There's just about no chance that the House will switch hands in this election, but the narrative, win or lose, is up for grabs.
And although the election will be decided on Tuesday (probably), the battle over the narrative to explain the results will have just begun. And it's that story -- the story that politicians will tell themselves to explain the results -- that will provide the background for the politics of the fiscal cliff that will dominate the end of 2012 and the beginning of 2013.
For once, the political rhetoric will count. Listen carefully as politicians try to explain to themselves what happened on Tuesday.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
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- Signs of trouble for Apple?
- Why Costco shares could hit $110
- Freeport-McMoRan's solid quarter
- Abbott, Bristol-Myers race for hepatitis cure
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Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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I am totally confused! Why on earth do people vote the bums back in when the approval rating of Congress is at an absolute low!! Are they rewarding these do-nothings (the Congress of NO)?
The result will be very interesting ~ and if the congress remains at an all time low and nothing is done in years to come, it is the fault of the voters. When workers don't do their job, they are fired. When Congress or CEO's don't do their job, they are still rewarded by being voted back in or offered millions in pay bonuses!
It don't matter what party wins the PEOPLE OF AMERICA lose. All I hear is middle class, middle class middle class. who is the middle class 200 K a year 500 K a year 1 million a year ?? OBAMAS PLAN TAKE FROM THE RICH & GIVE TO THE POOR. HOW'S ABOUT GIVING THE POOR JOBS & they will take care of themselfs. OH hell can it be that simple ?? Yes it can !!!. So people go out & waste your time voting because they already know who the electoral voters are & you know damm well with each spending a billion dollars each you know they already have who they need & have bought there vote.If you think WE THE PEOPLE put the pres in office think again. It's the biggest con in american history WE the people what a joke !!!!
The Americans that will decide this election are the ones who don’t drink either the Democrat controlled Media or Republican controlled Medias “kool aid”. We are sick and tired of both placing their parties agendas ahead of the countries needs. These wild back and forth elections between the two parties are just going to keep getting worse. Both parties keep mistaking a swing in their direction as a validation of their agendas and platforms. Nothing could be further from the truth; the swing is a rejection of the current parties promise for real change that was NOT delivered. The people of America are sick and tired of the Washington blame game. The party that figures this out and finally provides REAL and HONEST change will be a big winner, but neither party seem to be seems to be able to get their collective heads out of their own kool aid punch bowl and see reality. Practicing addicts never seem to be able to see their own future.
I also seem to remember that litterally HUNDREDS of bills which were passed by the Republican-controlled House were totally ignored by the Democrat-controlled Senate! It takes two to do the political-tango and if the Democrats were really interested in compromise they would at least have VOTED on a few of the House bills! Liberals are total hypocrites and need to be beaten at the polls before they finally "get it" and realize that they cannot have everything they want! If the Dems really had wanted to pass through all of Obama's and his liberal minions policies, they would have done it during the first two years of Obama's reign. They didn't because they knew in their hearts that it would have been political suicide and the slaughter in the polls in 2010 would have been much worse.
Even Bill Clinton had the intelligence to realize that if you wanted to get anything done in D.C., you needed to reach across the aisle. But, as Obama once said, "We won, deal with it!" His ideas of compromise entailed only the Republicans doing any compromise!
If reelected, BO does not have the stomach for reducing spending and working toward a balanced budget. So, Fiscal Cliff, here we come if he is reelected.
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....
This election is meaningless. it is a TOTAL waste of time and money. The nation is split between people that want to do away with social security and medicare to pay for wall streets greed and those who want to make wall street pay their share to pay down the debt they caused. I hear Romney and other republicans say we need to pay down the debt so our kids can have a future but, they want our kids to pay the debt with their social security and medicare benifits. Then when out kids retire they won't have nothing left to help them when wall streets greed wipes out thier 401K's and other retirement programs
When you turn social security over to the private sector someone has to make a profit. and the greed begains again and look where our kids end up. Living on the streets like many old folks did before we had social security and medicare but, don't take my word for it, look it up in your history books start in 1929 and, while your at it check on how the resessions seem to start every single time a republican is in office. then ask yourself " can we take another hit right now?'' well can we?
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 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.
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????
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!
Thanks for the really good laugh JP5. States like Wisconsin, Ohio, New York, Minnesota send the government more in tax dollars than they receive each year. You know, the hard working, family valued Blue States of the North. Now lets take your Red States of the South like Texas, Alabama, Mississippi, and Louisiana who suck down big time off from the government teat. These are your Welfare States whose economies are totally in the crapper. Get your facts straight, but I guess that is hard to do when you sit in your momma's basement, in your underwear, collecting your Food Stamps and blogging on the computer all day long.
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[BRIEFING.COM] The S&P 500 (+0.1%) hovers right above its flat line with seven sectors sporting gains.
Market participants received just one economic data point today (June Pending Home Sales -1.1%), but the rest of the week will bring a full slate of data. Tomorrow, the Case-Shiller 20-city Index (Briefing.com consensus 10.0%) will be released at 9:00 ET, while the July Consumer Confidence report (consensus 85.6) will cross the wires at 10:00 ET.
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