http://hotair.com/archives/2012/11/17/pro-tip-obama-doesnt-want-a-deal-to-avoid-the-fiscal-cliff/
http://www.zerohedge.com/news/2012-11-16/guest-post-ceilings-cliffs-and-tag-3-immediate-risks
Submitted by Tyler Durden on 11/16/2012 19:14 -0500
and....
http://www.zerohedge.com/news/2012-11-16/are-equity-vigilantes-keeping-press-honest-fiscal-cliff
Submitted by Tyler Durden on 11/16/2012 15:27 -0500
Submitted by Tyler Durden on 11/16/2012 14:53 -0500
Hunch: Obama doesn’t want a deal to avoid the fiscal cliff
POSTED AT 8:31 AM ON NOVEMBER 17, 2012 BY JAZZ SHAW
Everyone came away from the initial summit meeting between Obama, Boehner and Reid with big smiles and a public air of confidence that Friday’s kumbaya moment would lead to The Big Deal. Call me a cynic, but I’m still not buying it. Yesterday, AP touched on a part of this story, tossing out some ideas about how everyone – particularly Democrats – might walk away with relatively clean hands if no deal is reached on the fiscal cliff this year. It’s all true, but for some of us there’s a bit more to the story. The Democrats, for their part, seem to have plenty to gain and not much to lose.
Some Democrats are pushing an unorthodox idea for coping with the “fiscal cliff”: Let the government go over, temporarily at least, to give their party more bargaining leverage for changes later on.The idea has plenty of skeptics, and the White House regards it frostily. But it illustrates the wide range of early negotiating positions being staked out by Republicans and Democrats as lawmakers gathered Tuesday for their first post-election talks on how to avoid the looming package of steep tax hikes and program cuts.But why would this work for Barack Obama? Because – as we learned the hard way on election day – he can watch the polls with the best of them. And if this train goes off the rails he has reason to believe that he won’t be left holding the bag.A new poll by Hart Research’s Geoff Garin, conducted for Americans for Tax Fairness — a group that wants the Bush-era tax cuts to end for those who earn more than $250,000 — found that a majority of voters cited changing the tax system as a key factor in their votes, and that the majority broke for President Barack Obama.The survey also found that Democrats have changed the landscape on an issue that has eluded them for years — taxes. The survey found that most want the Bush-era cuts on top earners to expire, but that Republicans will shoulder blame if all of the Bush cuts, including those on the middle class, expire because a deal can’t be reached.Basically, this works out to a win-win for Obama. Yes, he could look like the great peacemaker and try to strike some sort of grand bargain with Boehner. And if he did, he would likely get some of what he and the Democratic majority want in exchange for taking a slightly less than maximum raise on taxes for the most wealthy. But why?If he takes a very hard line and forces the showdown to a collapse in discussions, several potentially positive (for him) results are baked into the cake. He can claim that Republicans refused a “balanced approach” and it’s their fault that everyone’s taxes went up. He then has the Democrats force a vote on a bill to only lower taxes on the middle class and the poor and just dares the GOP to vote against it. (They won’t.) At this point he has the tax / revenue increase he promised without giving up a single thing. Now the negotiations start anew to talk about “spending cuts” but the GOP’s major bargaining chip is gone. Obama gets to put up a far more shallow version of cuts, and if the Republicans don’t like it, they can choose to reject the deal and just let the deficit continue to skyrocket.What Republican in their right mind could go for this? Perhaps more than we might think.The Republican Party took the rap for the debt ceiling and is under suspicion for the fiscal cliff. A new Washington Post-Pew Research poll has 53 percent of Americans ready to blame Republicans if America actually goes over the edge and only 29 percent planning to point fingers at President Barack Obama.Understanding this, thoughtful Republicans are feeling freer to risk the tea partiers’ wrath and cooperate with Democrats. The teams may disagree on much, but at least they’re now playing in the same ballpark.How does that work? Fairly simple. Just as I’ve been saying since earlier this year, if you needed congressional action to raise taxes it would never happen. But in this case, to raise tax rates all you need is for Congress to do nothing. And when you need nothing done, there’s no better crack team than Congress. And once the taxes are up, even the GOP reps who have signed the Norquist pledge are free to sign a bill that lowers taxes… even if that doesn’t apply to the wealthy. They get to remain covered on their voting record in their home districts and blame the fallout on the Democrats.Here’s the part where I reveal my secret strategy of how the GOP can thwart this plan and come out on top.Hang on… there’s somebody at the door.
http://www.zerohedge.com/news/2012-11-16/guest-post-ceilings-cliffs-and-tag-3-immediate-risks
Guest Post: Ceilings, Cliffs And TAG - 3 Immediate Risks
- China
- Credit Crisis
- Debt Ceiling
- default
- Fail
- Federal Deposit Insurance Corporation
- Fitch
- Fund Flows
- Gross Domestic Product
- Guest Post
- Medicare
- Obamacare
- Personal Income
- President Obama
- ratings
- Reality
- Recession
- Treasury Department
- Unemployment
Via Lance Roberts of Street Talk Live,
The recent market sell-off has not been about the re-election of President Obama but rather the repositioning of assets by professional investors in anticipation of three key events coming between now and the end of this year - the "fiscal cliff", the debt ceiling and the expiration of the Transaction Account Guarantee (TAG). Each of these events have different impacts on the economy and the financial markets - but the one thing that they have in common is that they will all be battle grounds between a divided House and Senate.
While there has been a plethora of articles, and media coverage, about the upcoming standoff between the two parties - little has been written to cover the details of exactly what will be impacted and why it is so important to the financial markets and economy.
Fiscal Cliff
One of the primary reasons for the market sell off since the announcement of QE3 has been in anticipation of the some of the largest tax hikes in the history of America which will take place at the end of the year. These tax hikes will impact families and businesses, the middle class and the rich, the economy and the markets.
In 2001, and then again in 2003, President Bush and Congress enacted tax cuts to help restart the economy post the tech bubble, 9/11 terror attack and recession. Primarily these tax cuts were focused on small business owners, families, and investors and, while dubbed the "Bush Tax Cuts" became the "Obama Tax Cuts" when they were extended in 2010.
On January 1, 2013 the biggest hit to the economy will come from the increase of personal income tax rates. The top income tax rate will rise from 35 to 39.6% which is a 13% increase in taxes for the majority of small businesses that create roughly 70% of the employment in the U.S. However, more importantly, the lowest rate will jump a whopping 50% from 10 to 15%.
At the same time many of the itemized deductions and personal exemptions will also expire which has the same mathematical impact as higher marginal tax rates. The table below shows the effective changes.
The important point not to be missed is that higher taxes are likely coming regardless of any potential "deal" in regards to the "fiscal cliff." Higher taxes means less dollars going to consumption which is what creates the much needed demand on businesses to warrant increased employment and production. Higher taxes on businesses reduces the dollars available for capital investments, expansions and production. The net effect of higher marginal tax rates combined with new, or higher, taxes will slow economic growth and reduce revenue to the government.
Furthermore, higher tax rates on savers and investors, will reduce dollars flowing into the financial markets as dollars seek the lowest cost of investment. Furthermore, with interest rates already low, rising taxes makes capital investments less profitable. Therefore, capital will remain mired in "cash" rather than being deployed in productive investments which would spur future economic growth.
Obama stated repeatedly during the Presidential debates that he would not raise taxes on the "middle class" yet there are twenty new, or higher, taxes in Obamacare that will impact a broad cross section of the population. Some of these have already gone into effect such as the tanning tax, the medicine cabinet tax, the HSA withdrawal tax, W-2 health insurance reporting, and the "economic substance doctrine", however, more will go into effect on January 1st including the Medicare Wage and Salary Tax and the Medicare Investment Tax as detailed in the table above. Furthermore, medical device manufacturers will have to pay a new 2.3% tax on their products which will ultimately be passed along to the middle class through higher premiums. Industry analysis suggests that this tax alone will lead to losses of more than 43,000 jobs and over $3.5 billion in compensation.
Lastly, one of the biggest tax tragedies coming from Obama's healthcare plan is the "Special Needs Tax". There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Under current tax rules families can make unlimited contributions to FSA's to fund a broad spectrum of needs from treatments to education. Under Obama's new plan these FSA's will be capped at $2500 and then indexed to inflation after 2013. This is an effective $13 billion tax hike for these families.
The impact of all of these taxes is that there will be less money for individuals and businesses to spend and invest in the coming months ahead if the "fiscal cliff"occurs in full. This equates to roughly a $537 billion dollar hit to GDP in 2013, equivalent to a 3.5% reduction, which would push the economy into a deep recession.
Debt Ceiling
At the same time as Congress will be discussing what taxes to raise, keep or reduce - they will also be forced to deal with an impending debt ceiling debate. As a brief reminder the "debt ceiling" debate during the summer of 2011 pulled the financial markets lower by 10% in just three short weeks as the stand off between the House and Senate led to threats of U.S. default and ratings downgrades. With the Treasury Department once again warning congress that the debt ceiling will be hit by the end of November, well before the original estimation of 2013, the stage is already set for another showdown between President Obama and the conservative Republicans.
The debt ceiling is a statutory limit set by Congress. The statutory limit of debt issuance by the Government has been raised over the years by Congress as the country has grown. A common misconception is that by raising the statutory limit that Congress is authorizing NEW spending - this is not the case. Congress must raise the statutory debt limit to cover spending that Congress has ALREADY committed to spending such as Social Security, Medicare, and Defense.
The chart below shows the history of Federal debt issuance as compared to the statutory limits set by Congress.
The problem, of course, is in the acceleration of spending. While the current Administration is busy convincing the American public that the "rich" just need to pay their "fair share" the simple reality is that the U.S. faces a "spending problem." While increasing taxes sounds like a simple solution on the surface, as discussed above, it leads to lower economic growth rates as each dollar that is diverted into taxes removes a dollar from savings or productive investments.
Currently, it requires every dollar of revenue brought in from taxes just to cover non-discretionary spending. This leaves all discretionary spending coming from the issuance of additional debt. From 1993 to 1997, during the Clinton's two terms as President, the debt ceiling was raised 4 times for a total increase of $1.8 trillion. President Bush then raised it during his two terms 7 times for a total of $5.37 trillion. Obama, during just one term as President, has increased the debt ceiling 6 times for a total of $5.08 trillion. The current run rate of debt increases is clearly unsustainable in the long term.
The negative impacts of debt on economic growth are not widely discussed (seeDebts and Deficits: Killing Economic Prosperity) but prior to 1980 it took roughly $0.50 of debt to create $1 of eocnomic growth. The current Administration has increased Federal debt 45%, along with roughly $29 trillion of other funding, bailouts and stimulus, to garner a total of 7.1% economic growth during that period - or roughly $5.40 of debt for each $1 of economic growth. That really isn't a good return on investment.
The last debt ceiling debate ended with a steep market sell off, contracting economic growth and a downgrade by Standard & Poors of the U.S. debt rating. In the end the debt ceiling was increased. No budgets were adopted. Spending continued and debt now exceeds 100% of GDP at $16.25 Trillion.
The battle lines are once again being drawn with the Republican controlled House pushing back against the Democratic Senate demanding cuts in spending, tax code reform and no increases in taxes. The Senate wants the debt ceiling raised without spending cuts and tax rate increases. Fitch and Moody's has warned of downgrading U.S. debt if the"fiscal house" is not put in order but Obama is demanding higher taxes on the "rich" and is unwilling to compromise on entitlement programs.
For investors this is round two of the same boxing match that ensued last year. Ultimately, the debt ceiling will be raised. The U.S. will NOT default on its debt (we are a sovereign currency issuer and as such can print money to meet our obligations) and the U.S. will not go bankrupt. However, the rhetoric of such things happening, combined with the potential delay of resolving the"fiscal cliff," could well create a sharp selloff in the financial markets.
TAG
While everyone is afraid of falling off the"fiscal cliff" there's another issue looming large into the end of the year that could put further financial strains on the economy and the financial markets. The Transaction Account Guarantee (TAG) program, which was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under, is set to expire at the end of this year.
The TAG program was put into place by the FDIC to up regular deposit insurance from $100,000 to $250,000 and unlimited insurance for all non-interest bearing transaction accounts. It is the second part that's most important as it comes to an end.
When the unlimited insurance expires the cash of corporations, businesses and depositors, which totals more than $1.4 trillion, becomes uninsured. This could create some serious negative repercussions for small to medium size financial institutions which could be impacted by deposits fleeing into the safety of short-term U.S. Treasuries.
There are two negative consequences for the economy and the financial markets. The first is that many small and medium size financial institutions could face solvency issues leading to another, yet much smaller, financial crisis in the U.S. Secondly, the too-big-to-fail (TBTF) banks which are primarily responsible for the last credit crisis are likely to become too-BIGGER-to-fail. As the unlimited insurance on their deposits expires businesses will move money elsewhere, and since the Government has already proven that they will not allow the biggest banks to fail, they are the most likely recipients of fund flows.
The problem, for the financial system and the economy, is that as TBTF banks continue to swell the risk of another financial catastrophe increases. As the guarantees vanish depositers will likely move money to money market funds which requires fund managers to invest that capital for a return. With an ever increasing cash balance the options for investment becomes more restricted and requires excessive risk taking. History, as a guide, tells us that the TBTF banks are not good risk managers, aka JP Morgan's London Whale, and the next time a financial crisis occurs - a bailout may simply not be an option.
For individuals this also means that borrowing and transaction costs will continue to escalate. This cost, like higher taxes, reduces the savings available for consumption and investment leading to reduced aggregate end demand and lower economic growth.
Likely Outcome
These are the three big risks going into the end of the year as I see them - and each one has the ability to impact the financial markets and the economy. Combined they could be disastrous.
While it is highly expected that the Obama, and the Senate, will find common ground with the Republican led house - this is an assumption that I would not be so sure of. Congressional elections are coming up very soon and the "Tea Party"candidates were sent to Washington with a mandate to get Washington into fiscal order. The House already rolled over once during the previous debates in 2011 on the promises of spending cuts being made. The Administration failed to follow through. Therefore, it is highly likely that this particular debate on the fiscal cliff, and the debt ceiling, could turn out much more contentious than expected.
Do not misunderstand me. A deal will eventually be reached and the debt ceiling will be raised. The U.S. will not default on its debt and the country will not be forced into bankruptcy. However, the impact to the financial markets, and ultimately the economy, from a prolonged battle could be far more damaging that investors currently believe.
Furthermore, taxes will go up in 2013, of this I am sure. The reality is, however, that most of the current tax rates will likely be extended short term along with a deferral of the taxes imposed by ObamaCare into 2013. There will also be spending cuts that will agreed to which will likely be more symbolic in nature than effective. Reduced defense spending is almost a given but that will have a direct, and negative, impact on economic growth.
The financial markets and economy are currently under attack from a recession in Europe, a slowdown in China, rising costs, high "real" unemployment, and the potential for sharply rising taxes at a time when income growth is stagnant. The risks of a recession are rising as earnings are rapidly deteriorating - quite simply this is a formula for a more protracted market correction.
and....
http://www.zerohedge.com/news/2012-11-16/are-equity-vigilantes-keeping-press-honest-fiscal-cliff
Are 'Equity' Vigilantes Keeping The Press Honest On The Fiscal Cliff?
- Bond
- Debt Ceiling
- European Central Bank
- headlines
- Market Crash
- Medicare
- President Obama
- Reality
- TARP
- Vigilantes
In the past it has been the bond market whose vigilantes had rampaged across the fields to keep policymakers honest - but something has changed with the Fed's boot on the bond market. As BofAML notes, when the Fed was too soft on inflation or the fiscal deficit was out of control, interest rates spiked higher. In our view, this has changed and today the stock market is the disciplining force for Washington. We have argued this perspective for a while - that nothing will be done until we get a stock market crash - but the press will continue to make molehills out of mountains it seems as BofAML adds, the most obvious lesson of the last week is that when Washington approaches a policy impasse, the financial press tends to signal a resolution of the crisis many times before it happens. Don’t believe it. After elections there is always conciliatory talk: no one wants to be seen as a sore loser or a gloating winner. The risk remains huge and the four hurdles to a grand bargain seem to be getting larger - no matter what the press wants us to think.
Via BofAML: Taxing Negotiations
In the past week, Democrats and Republicans have staked their initial negotiating position on the fiscal cliff. The news is not encouraging. As our regular readers know, we expect a complex negotiation process that takes many months and multiple brinkmanship moments before full resolution of the cliff. The news in the last week confirms several of our concerns.
Press fakes
Perhaps the most obvious lesson of the last week is that when Washington approaches a policy impasse, the financial press tends to signal a resolution of the crisis many times before it happens. This was evident in the first few days after the election. In his acceptance speech, the President said: “You elected us to focus on your jobs, not ours. And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together.” On a similar note, House Speaker Boehner said “Republicans have signaled a willingness to accept new revenue if it comes from growth and reform.” These positive statements prompted several days of optimistic headlines.
Perhaps the most obvious lesson of the last week is that when Washington approaches a policy impasse, the financial press tends to signal a resolution of the crisis many times before it happens. This was evident in the first few days after the election. In his acceptance speech, the President said: “You elected us to focus on your jobs, not ours. And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together.” On a similar note, House Speaker Boehner said “Republicans have signaled a willingness to accept new revenue if it comes from growth and reform.” These positive statements prompted several days of optimistic headlines.
Don’t believe it. After elections there is always conciliatory talk: no one wants to be seen as a sore loser or a gloating winner. Moreover, surveys show the US public wants politicians to start working together. However, we believe investors should look past reassuring rhetoric and focus on the underlying reality. Recent budget impasses have virtually always gone to the last minute and sometimes beyond. In the latest incarnation, the two sides have dug in their heels on income taxes and have not even started to discuss the rest of the cliff. The disagreements between the two parties run very deep and neither side wants to give ground until it has to. The stakes are particularly high in the first round of negotiations: policy steps today could set the tone for the next several years.
Wile E. Coyote moment
The recent commentary also underscores the risk of going over the cliff before a compromise is reached. As we have noted before, in the run up to the election a wide range of commentators were suggesting that going over the cliff is not such a bad idea. They argue: (1) it won’t hurt the economy if it is temporary, (2) it is a good way to extract concessions from the opponents, (3) it resets the starting point for debate (it is easier to restore tax cuts and rescind spending cuts than to do the opposite), and (4) it allows time to get a better crafted deal. In his first press conference after the election, President Obama hinted that he, too, might be willing to go over the cliff, arguing that that raising taxes on the wealthy must be the first step in any budget deal. Keep in mind that the path of least resistance is down: it is much easier for one party to block legislation, and go over the cliff, than to forge a compromise and avoid the cliff. Some people argue that the weak showing of Republicans in the elections means they will be more inclined to compromise, reducing the risk of going over the cliff.
We are not so sure. After all, the Republicans need to first sort out why they did poorly. Moreover, while the election result may have softened the Republican position, there are plenty of early signs that it has stiffened the backbone of Democrats. For example, President Obama has repeatedly argued that the election is a “very clear mandate” to raise taxes on the wealthy. By contrast, Republican vice presidential candidate Paul Ryan said that there is no such mandate because the public also “reelected the House Republicans.” Are the two sides closer together or farther apart? It is hard to say, but clearly the gap remains very big.
The Grand Distraction
The post-election discussion underscoresthe futility of trying to get a quick “grand bargain,” putting in place a long-term plan for deficit reduction. Speaker Boehner has emphasized that any increase in tax revenues should come from broad-based reform: “in order to garner Republican support, the President must be willing to reduce spending and shore up the entitlement programs that are the primary drivers of our debt.” While tax and entitlement reform are good long term goals, are they really feasible in a few months?
A near-term grand bargain faces not just one, but four major hurdles:
- A low starting point: Neither party has even scratched the surface in presenting a feasible plan for either tax or entitlement reform, in our view. Tax reform requires tough choices around which loopholes to cut, a topic that has been carefully avoided by both parties. Medicare reform also requires tough choices around how care is rationed. Republicans have offered a voucher plan, but haven’t mentioned that it will only reduce costs if patients have large out-of-pocket expenses so they have an incentive to limit their spending. Democrats have offered to cut payments to providers, but without any impact on service. The American public needs to be educated about the true options it faces.
- Bi-partisan cooperation: As was clear in the 1986 tax reform, getting complicated and contentious reforms enacted is very hard without true cooperation, particularly with relatively evenly divided government. The leaders of the two parties have to stand together and fight the special interests.
3. High complexity: The US tax code is extremely complicated and any attempt to change it creates many winners and losers. It has big impacts on the many special interests with tax advantages. It also redistributes income across not just income classes but between states (ironically, high-income people in the “Blue states” that voted for the Obama have the most to lose since those states tend to have high mortgages and high state and local taxes). If anything, Medicare reform is even more difficult since it involves life and death choices and there are fundamental disagreements about the relative role of markets and administration in controlling costs.
4. A sizable gap in view: The two parties strongly disagree about how tax reform impacts the economy. Republicans argue that most of the revenue from tax reform will come from creating a stronger economy. In the past week, President Obama countered: "What I will not do is to have a process that is vague, that says we're gonna sorta, kinda raise revenue through dynamic scoring or closing loopholes that have not been identified."We agree that it is important to start laying the ground work for tax and entitlement reform, but we also believe it is also important to get the sequencing right. First, dismantle the fiscal cliff, and then start negotiations on the longer term solutions.
Stock market “vigilantes”
Historically the bond market has been a disciplining force for policymakers. When the Fed was too soft on inflation or the fiscal deficit was out of control, interest rates spiked higher. In our view, this has changed and today the stock market is the disciplining force for Washington. Stocks have generally endorsed Fed policy. We estimate that stock prices rose a cumulative 15% in the past three years in response to Fed announcements or actions. While some investors have misgivings about what the Fed is doing, the overall market likes it. By contrast, the stock market is giving a clear no-confidence vote to fiscal policymakers. This was particularly clear when the TARP bailout plan failed to pass and at the end of the debt ceiling debate.
Today, the stock market “vigilantes” are gathering again. In early September we argued that “there is a high risk of a risk-off trade in the markets after [the Fed meeting on] September 13.” We argued that market focus would shift from Fed and ECB easing to fiscal policy risks. In the event the Fed meeting did mark a turning point in the markets, and with the election over and the fiscal cliff taking center stage, the downward pressure has accelerated (Chart 1). This weakness has occurred despite better news on the economy and an unremarkable earnings season.
The fiscal cliff is unlikely to be resolved quickly or in a completely benign fashion.Our advice:
“fasten your seatbelts and remain seated until Co-pilots Obama and Boehner turn off the fasten seatbelt sign.”
In particular, we would be leery about a big air pocket in late December, when our political pilots decide whether sharply drop altitude or not.
and........
http://www.zerohedge.com/news/2012-11-16/todays-fiscal-cliff-compromise-moment-brought-you-congressional-short-squeeze-incept
Today's "Fiscal Cliff Compromise" Moment Brought To You By The Congressional Short Squeeze Inception Team
Once again the market falls for the politicians' snake oil (as we explainedbefore). Unconvinced? This is what none other than "Fiscal Cliff compromise is imminent" photo op participant Nancy Pelosi said moments later to the WSJ:
Ms. Pelosi said. "I was focusing on how we send a message of confidence to consumers, to the markets in the short run, too."
And there you have it from the horse's mouth: absolutely nothing of actual substance in today's presser which was completely hollow of anything remotely resembling an actual compromise, but merely the same type of Euro-propaganda we have grown to loath and despise for the past 3 years, where a flashing red headline was supposed to generate a short squeeze. It succeeded.There is one open question: did Nancy Pelosi's multi-millionaire investor husband Paul Pelosi know ahead of time what the announcement would say, and did he buy any securities in hopes of a "short run" gain?
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