A month back I warned that the US political class was adopting the very same tactics employed by EU politicians in combating our growing economic/ financial problems.
Those tactics are as follows:
- Stage a meeting/ talk
- Spread rumors that a solution had been reached (verbal intervention to prop the markets up)
- Fail to address any real issues or provide solutions
- End the meeting with a PR campaign that much was accomplished without providing any details
- Wait for the markets to realize that nothing was fixed and fall
- Repeat the whole process over again
This strategy has allowed EU officials to drag out the Greek issue (a country whose economy comprises only 2% of the EU’s GDP) for over two years with little political consequences for the key players. Seeing this, the US political class is now employing these tactics in full force as revealed by the fiscal cliff debacle.
Regardless of one’s political affiliation or beliefs, from an economic and fiscal perspective, the cliff deal has accomplished nothing of import. The tax increases will raise $620 billion over the next ten years. So that’s roughly $62 billion in new tax revenue per year.
The US has run a $1+ trillion deficit for four years now. $62 billion is barely even 6% of this. When you combine this with the proposed $15 billion in spending cuts (less than even 2% of our deficit) presented in the “deal,” it’s clear that nothing of significance has been addressed or solved.
Regardless, the markets rallied on this news, just as they’ve rallied on countless rumors of a Greek solution and other announcements from EU leaders over the last two years. Verbal intervention is a key force for the political class. They will use it as much as they can.
In broad strokes, this is the official playbook for political leaders in the Western world. Facilitating this is the ongoing monetary easing by the global Central Banks who have collectively pumped $10 trillion into the system since the Great Crisis began. In simple terms, Central Banks provide the glue to hold the system together while politicians meet and negotiate without ever really solving anything.
This will work until the bond markets finally begin to crack. With Central Banks buying much of the bond issuance coming out of the Western world, once the bond markets really drop it’s game over for this scheme as the Central Banks won’t have the firepower to keep the system together.
On that note, the S&P 500 continues to trace out a large rising wedge pattern. We’re at a critical juncture: overbought in the middle of the pattern. Whichever way we move from here will outline the intermediate trend.
Meanwhile, the 30-year Treasury is once again testing its upward sloping trendline. Bernanke better hope this line continues to hold because he’s fast running out of ammunition.
On that note, we recently outlined a number of targeted trades to help our Private Wealth Advisory newsletter subscribers profit from the fiscal cliff negotiations.
Chief Market Strategist
Phoenix Capital Research
Despite ‘Cliff’ Deal’s Cuts, Your Taxes Are Going Up
While the tax package that Congress passed New Year’s Day will protect 99 percent of Americans from an income tax increase, most of them will still end up paying more federal taxes in 2013.
That’s because the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring. In 2012, that 2-percentage-point cut in the payroll tax was worth about $1,000 to a worker making $50,000 a year.
The Tax Policy Center, a nonpartisan Washington research group, estimates that 77 percent of American households will face higher federal taxes in 2013 under the agreement negotiated between President Barack Obama and Senate Republicans. High-income families will feel the biggest tax increases, but many middle- and low-income families will pay higher taxes, too.
Despite Cliff Deal: ‘Nothing Really Has Been Fixed’
An emergency deal reached after weeks of rancorous negotiations will keep the U.S. from driving off the “fiscal cliff,” but higher taxes and continued political bickering in Washington threaten to shake the fragile economy well into 2013.
A bill passed by Congress late Tuesday averts widespread tax increases and delays spending cuts that had threatened to take a bite out of the economy. (Read More: US Avoids Calamity in ‘Fiscal Cliff’ Drama)
But critical issues, including reduction of the deficit, remain unresolved. Meanwhile, the economy doesn’t have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012. Unemployment stands at 7.7 percent.
Ben Schwartz, chief market strategist for Lightspeed Financial, said unemployment was still likely to edge up and retail sales growth was likely to be weaker than last year.
“Regardless of a deal getting done, people on Wall Street are not going to run around giving high fives,” Schwartz said. “The federal government is obviously dysfunctional, to say the least.”
Santelli: “There Has To Be An Endgame To Insanity”
The ‘deal’ didn’t surprise CNBC’s Rick Santelli as he notes the administration did the “easy thing” once again. However, he does think the coming battle in 6-8 weeks regarding the debt ceiling will be surprising to many and believes “there has to be an endgame to insanity.”