Obama, GOP face off at the edge

With a second term secured, the president squares off against Congressional Republicans with deadlines on the fiscal cliff and the nation's debt ceiling fast approaching.

By Anthony Mirhaydari Nov 9, 2012 3:34PM

Image: Washington, D.C. (Corbis)

Wecome to Obama vs. the Tea Party, Round 2.

 

Apparently, suffering through the economic and financial turmoil of August 2011, when the U.S. Treasury lost its "AAA" credit rating from Standard & Poor's as President Obama and Tea Party Republicans in the House fought over the nation's debt limit, wasn't enough.

 

Because on Election Day, Americans kept the fight going. And the stakes are higher this time.

 

As I've been writing over the last few weeks, the "fiscal cliff" of tax hikes and spending cuts worth some 5% of GDP are set to hit on Jan. 1 unless action is taken. The cliff is made up of tax cuts and spending hikes that have been a source of gridlock on their own. (See the seven parts of the fiscal cliff.)

 

Now, we're facing a fiscal cliff deadline, plus the country is again approaching its debt limit, now at $16.4 trillion. Add in a nervous business community, recent pullbacks in capital investment, hiring and stocks, and this is shaping up to be a battle royale. Here's where I hope the politicians take us.

 

As I said in my recent column on the subject, avoiding the cliff by keeping taxes low and spending high will cause the national debt to explode -- an option that will eventually weigh on economic growth and worsen the deficit via higher interest costs. And jumping off the fiscal cliff isn't really a viable option either since it will torpedo the economy and result in a recession/deficit death spiral of the like being suffered by Greece.

 

So we need a compromise solution focused on short-term pro-growth measures mixed with an attack on the structural, medium-term drivers of the deficit which are, mainly, out-of-control healthcare cost inflation. When people get jobs and make more money, they will pay more taxes and absorb less government benefits.

 

That will fix the cyclical deficit. But underfunded health-care entitlements will kill us, fiscally, unless we act. As things stand, the Congressional Budget Office believes the cost of government health care spending will grow from 5.4% of GDP now to 12% by 2055. And before people get upset at the term "entitlements," know that a typical middle-class couple retiring in 2010 is on track to collect $387,000 in Medicare benefits after paying in only $156,000 in taxes.

 

Republican House Speaker John Boehner has opened the door a little, saying he is looking for a temporary reprieve from the fiscal cliff during the current lame-duck session to give Washington time to work on a deal in 2013.

 

On the tax issue, he believes raising taxes on the wealthy, which Obama wants to do, will further damage the economy by slowing job creation. This is an important point I've discussed before, given that many pass-through small business entities pay the personal income tax rate and are having trouble raising capital from banks right now.

 

Instead, Boehner proposes adding revenue by reforming the tax code. This plan for a simpler, cleaner tax system with fewer loopholes could boost tax revenues while still boosting business confidence by reducing the economic dead-weight loss of tax compliance. It also looks a lot like what Mitt Romney was calling for, a plan that 48% of the country supported. Whether ardently anti-tax Tea Party Republicans would go along is another question.

 

I hope Obama sees that he can still get the rich to pay more in a way that won't damage sentiment, such as leaving the system unreformed and simply raising the margin rates on top earners would.

 

For his part, Obama also seems to be softening his position a little by opening the negotiating process to business and civic leaders and saying he is not "wedded" to every detail of his existing deficit reduction plan. He has also emphasized the need for infrastructure investment, which would be another short-term pro-growth stimulus and a positive for the economy. But he does say he has a mandate for tax hikes on the wealthiest Americans.

 

Still, a simple look at the numbers courtesy of Merrill Lynch shows that we can't tax our way out of this. Ending the Bush tax cuts on the wealthy will only result in about $40 to $80 billion of the first-year, $720 billion toll of the fiscal cliff. And anything above that risks recession, which will only make the deficit worse. Other items, like the cuts to the Pentagon budget, the cost of extended unemployment benefits, and the payroll tax cuts, will have a much larger impact on the bottom line.

 

My hope is that the Republicans placate Obama's emphasis on taxing the wealthy via tax code reforms so that the real work can begin on addressing health-care costs.

 

What are investors to do in the meantime?

 

While stocks have been doing their best to scare investors since President Obama's reelection, gold and silver have been quietly marching higher. The mining stocks are following, with the Market Vectors Junior Gold Miners (GDXJ) popping out of a three month consolidation pattern on a nice increase in volume.

 

 

Technically, the setups beautiful and suggest a medium-term uptrend -- of the kind we haven't seen since last July -- is getting started, particularly for the mining stocks. But there are fundamental reasons to believe the run will continue too.

 

For one, the political uncertainty surrounding the fiscal cliff and the debt ceiling has people looking for safe havens.

 

Plus, inflation is actually creeping higher as the Federal Reserve prepares to unveil a possible QE4 initiative next month to replace its expiring "Operation Twist" program and complement its QE3 of ongoing $40 billion-a-month mortgage purchases. If the Fed wanted to maintain its current pace of money printing, QE4 would need to result in $45 billion a month worth of Treasury bond purchases.

 

In anticipation, I'm adding the ProShares UltraSilver (AGQ) to my Edge Letter Sample Portfolio.

 

Disclosure: Anthony has recommended AGQ and GDXJ to his clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.  

 

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425Comments
Nov 16, 2012 2:28AM
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1 last note for Mirage Guy and Minority1111   you both say Fire off and don't hire "the enemy" who are democrats.  Something tells me that you are more then happy and probably kiss the "Democratic" customers/business contacts ****'s all day to get their help and money....
Nov 11, 2012 11:55PM
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Can someone explain to me how Obama can say what Anthony summarizes above - namely "he [Obama] does say he has a mandate for tax hikes on the wealthiest Americans".

 

The popular vote that Obama received represents an amalgamation issues where those voters agreed with him. Sure, some voted for him to tax the wealthiest Americans, while other votes were cast for Obama since they agreed with him on completely different issues.

 

Obama can't reasonably say that the popular vote was *only* for tax hikes on the wealthiest Americans. If he does, he could use that on every issue he wants to push forward in his second term.

 

Thanks!

Nov 11, 2012 10:11PM
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Re:

"And before people get upset at the term "entitlements," know that a typical middle-class couple retiring in 2010 is on track to collect $387,000 in Medicare benefits after paying in only $156,000 in taxes."

While this may be true; the 156K was paid over time e.g. 1950 thru 2012. Had these same dollars been invested they would be worth more than the 2010 value of 387K. Therefore these facts are misleading at best.

Nov 11, 2012 10:08PM
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One thing this nitwit author doesn't say and is trying to sway you to believe that the middle class couple that will get more than they put in is just liberal BS. They want you to believe you just haven't done your fair share and need to pay the government more in taxes. If you assume that over a 45 year working life a couple that paid in $156,000 with compounding interest, of lets say 5%, would have somewhere around $588,000 amassed. This sounds like the middle class couple is getting short changed, not the government, like nitwit would have you believe. So, you can only imagine how our idiot government has squandered everything, including SS that pays out an average of $1200 a month to recipients that have paid in somewhere in the neighborhood of $225,000 over that 45 year working life. Making those same assumptions as with the Medicare you would have amassed somewhere around $893,000. Let's say you are in great shape and start drawing your SS at 65 and live to be 100 years old. You would have drawn nearly $504,000 from SS when you die. So, my question is how in the hell could SS be in trouble if they are shorting people nearly $400,000 that live to be 100 years old. What about the people that die before ever drawing a penny. Where does their $893,000 go? What nitwit is assuming is that the  money you are paying in doesn't earn interest, which is BS. Wake up people, the government is not the solution, they are the problem.
Nov 11, 2012 9:32PM
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I applaude all you extremeist republicans, you continually demonstrate that you all share the same brain, Grover Norquest said on national tv that your president did not need to think up ideas because the Tea Party would supply national policy and all the president needed to do was to be able to move his fingers and sign the bill in to law!  In adition you did your best trough surrogates at state level in key battleground states to deter voting rights, however, we have a brain and waited  in long lines to exercise our right to vote against Grover and his minions .  Republicans thought being a Norquist bigot,racist,homophobe,fanatic and dictatorial plutocrat would win the election.  Your plutocrats based upon the Wall Mart ideal of making poor american workers into three dollar an hour workers like Wall-Mart factory workers in China failed.  "Praise the lord" our democracy has survived the the , racist ,hateful, vicious brain of the Republican party.  It is such a shame that millions of thoughtful, smart , hardworking , great American Republicans, sit buy and let the hatered  of Norquest and minions try to destroy the country we love. 
Nov 11, 2012 9:21PM
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The tea party needs to euthanize themselves. They are the problem, not a solution. Arrogance is arrogance, and that is who they are. They are a movement that has failed. They have torn this

country apart and lost their party the election for the Presidency.  Sarah....go fishing, or kill a bear.

you do not represent us.

Nov 11, 2012 9:17PM
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You sir, are as big a moron as obama is.
Nov 11, 2012 8:51PM
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Republicans are very predictable , most of them swear by th e  FOX entertaintment Republican channel
Nov 11, 2012 8:49PM
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I say let it happen.  The tea party won't have to vote for a tax hike.  Does anybody remember back before ronnie raygun.  When dividend taxes were high.  The rich made money back then, and there was a middle class 10 % larger than there is now.  The good old days for us in the middle.
Nov 11, 2012 8:17PM
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gm saved by government.  expand small business initiatives by government. dont just give large corporate idiots a break.
Nov 11, 2012 8:13PM
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we got ourselves the bomb and mass internet thru government.  government energy initiatives and research initiatives. put the scientists to work and improve quality of life.
Nov 11, 2012 8:10PM
Nov 11, 2012 8:09PM
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free internet education for everyone.
Nov 11, 2012 8:08PM
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computerize and roboticize all factories.
Nov 11, 2012 8:07PM
Nov 11, 2012 8:01PM
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foodstamps and free rent for everyone.
Nov 11, 2012 7:14PM
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The tax cuts have to end....along with a revamp of the government assistance program AKA Welfare!  Both my daughters are college students with 1 holding a Bachelor's degree working on her Masters and my other 1 year away from her Bachelor's. I am funding there education endeavors because I want them to make a change in the future. How do you explain others there age having a nice place to live, nice vehicle and the latest phone and never worked but is on welfare?  Welfare is equivalent to Social Security for those ages, 18-30.  I live well within my means as a lower middle class statistic. Tax / penalize all the companies who relocated there labor overseas at a cheaper rate but stick us when it arrives on U.S. soil. The tax system does need a serious overhaul to get rid of all the loopholes and exclusions benefiting big corporations and the wealthy.  Many citizens have lost confidence in our economy let alone the world. 
Nov 11, 2012 6:45PM
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How come we just do not go to a flat tax, no exceptions. We may put a lot of IRS workers out of work, but they can share the pain.
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