By Colin Moore
December 4, 2012
The Argentine tango is danced to certain “rules”:
- The dance is conducted in an embrace that can vary from very open, in which leader and follower connect at arms length, to very close.
- Dancing appropriately to the emotion and speed of a tango is extremely important. A good dancer is one who transmits a feeling of the music to the partner.
- Dancing relies heavily on improvisation.
- The dancer rarely has his or her weight on both feet at the same time so they can quickly change position.
Both sides in the fiscal cliff negotiations are playing familiar roles in a largely choreographed dance. It is hard to argue that the dancers were close so soon after the election, but the headlines suggest the fiscal cliff talks in Washington are “stalled,” “stuck” and “stalemated.” Republicans have rejected President Obama’s initial offer as not serious. The President returned to the “campaign trail” as discussions/negotiations that should be conducted quietly moved to hour by hour revelations of essentially nothing. Some interpret these moves as posturing to minimize the impact on voter perceptions ahead of failed talks. This interpretation may be premature but cannot be ignored. Politicians tend to remain light on their feet allowing them to change position quickly, so investors should be wary of reacting to the emotion and speed of announcements during this overly public process. However, the President has backed the Republicans into a difficult corner and deft footwork will be required to elegantly get out of it. It is considered rude to bump into or stand on the toes of other dancers during the tango — many Republicans may have no choice. Notably, they will have to bump aside the no-tax-increase pledge designed by Americans for Tax Reform’s Grover Norquist. Norquist is reported to have said, “No Republican has voted for a tax increase. We’ve got some people discussing impure thoughts on national television.” It wouldn’t be the first time those watching a passionate tango have had impure thoughts and it will not be the last. Politico summarized the current position as follows: “The White House notes that it has now put its wish list on the table, rallied Democrats to its side and pushed Republicans into the position of having to counter with painful spending cut proposals. The White House is also very pleased that it presented these very same plans to a parade of CEOs who left the West Wing this week mostly praising Obama’s proposals as reasonable and begging for some kind of compromise. Republican aides also say they will eventually have to swallow at least some of what the president wants. — Still, there may be more bellowing, even a failed vote or two could send markets swooning. But a deal will get done, most people close to the matter say.”
Investors should be prepared for a sizable tax hike in excess of $1 trillion. The Republican position on taxes is untenable. I can find little evidence that a tax yield of approximately 18%/19% harms the economy. I am in the camp of lower tax rates and fewer deductions especially for incomes above $500,000. However spending is at a level not seen since World War 2. I hope and assume spending cuts will be identified but largely deferred. I am supportive of the deferral assuming the cuts are specifically identified and the deferral period is explicit. However the ratio of cuts to tax increases needs to be approximately 2 to 1.
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