The Cliff Circus Was Just a Warm-Up
If you think you can relax now because in the end Washington will find a fix, you are living in a mushroom cave. Take it from an old guy who has watched the changes in our government, and how Washington works, over far too many decades. This is really a massive crisis and total lack of presidential leadership. Just because we got a goodie with the leasehold rules, donít think we won anything when the real issue is the macro issues that will have far worse detrimental impact due to not dealing with the deficit. Over time, interest rates will rise too far as the US is viewed as a greater risk for not dealing with its fiscal issues. The Fed will not be able to offset the fiscal disaster much longer without creating a monetary disaster somewhere in the future. The economy will continue to underperform. That is far worse than a little tax extender for leaseholds. The reality is all they did was raise income taxes on the few who actually pay income taxes, raise payroll taxes on the middle class-which they needed to be raised, and increased spending. The claim of $600 billion of new revenue is no different than the accuracy of appraisals. They use false assumptions for a 10 year projected cash flow and the accuracy has no relationship to reality. Never in history anywhere in the world has raising tax rates on the successful ever raised the projected revenue. †Smart people, who are the ones who pay these higher rates, find perfectly legal ways to reduce the hit through trusts, deferrals or whatever their tax advisor creates. Or they move as we see in France. Obamacare has buried in it several additional new taxes of which 3.8% cap gains is just a piece. Now that Obama and the Democrats won the political war, they are already saying now we need more taxes through limiting deductions. You can count on more tax increases, and it will hit you in forecasting returns. Carried interests is in the target area, as are other deducts that we all assume. Then there is new spending coming for more wind and solar even though the real solution is more fracking to get at cheap gas which is not subsidized by taxpayers like wind and solar. In the end, the last circus is just a warm up for the real battle over spending. Harry Reid and Pelosi, along with Obama, have already started to pound on the 47% to convince them that the Republicans only want to harm the seniors, students, handicapped, and anyone else who are getters not payers. I have Medicare. I had two knee operations, MRIís and other procedures. I paid ZERO for any of it. That is ridiculous. If going to the doctor costs me nothing, then if I wanted, I could go everyday for free, so many old people do just that. Fee for service is stupid. It just wastes hundreds of billions.† If they canít even agree to chain CPI and raising the age of entitlement the way Reagan did, then it seems hopeless to think there is going to be any control of the massive deficits. It is now, or the pain later will really harm the economy. There will be no money for anything. The reality is none of these fixes harm anyone, and they save these programs, and the country for our children, and many of you. Interest rates would be normalized and the economy would boom. Everyone would win.
Washington love to talk about 10 year projections and numbers, but reality is in 12 years, not 10, the entitlement programs go broke. Twelve years goes quick. When Harry Reid says there is no need to touch Social Security now because it is fine, you wonder if he has a brain defect, or is just so old he canít get his brain to function any longer. Boehner was right to tell him to F off, and it was clear even McConnell could not get anywhere with Harry. If they do not do at least $3 trillion of spending and entitlement cuts, the country is screwed. Bowles has made it very clear that $3 trillion of spending cuts is bare bones minimum, and just a start to try to stabilize the deficit. I seriously doubt they will come anywhere close to that number.
Obama and the Democrats think they won a great battle over tax rates, but we all lost. Raising rates fixed nothing. Tax reform, which now looks unlikely to happen, and limits on certain deductions would have been far more effective and would have cleaned up a tax code that nobody thinks makes any sense. Boehner did the right thing to offer $800 billion of revenue based on limiting deductions and tax reform. He was naÔve to think Obama had any interest to do the right thing for the country. Obama is simply interested to win political points with the left instead. According to Woodward, it was Obama who blew the grand bargain at the last minute by retrading the deal in 2011, and it was he who refused to deal in any good faith this time. There is plenty of fault to be had by the Republicans and the right wing, but in the end these matters require the president to lead and cut the deal. That is what Clinton, Johnson and Reagan did. Even though Johnson had voted against civil rights bills his entire career in Congress, as president he realized it was the right thing for the country and he rammed through the voting rights act and other civil rights legislation despite his own beliefs and those of the powerful southern block. Clinton worked out welfare legislation with Gingrich, even though his left wing screamed. That is what a president is supposed to do. They are elected to cut a deal that is right for the whole country no matter what the far right or far left demand. Obama thinks transforming America into Europe, and winning political points is a much better thing to do. He said he would transform America, and we now see what that means. Higher taxes for the small percentage of us who actually pay most of the taxes, more government control of your business, and much more entitlement spending. When you do forecasts you better assume much higher interest rates in 4 years, more restrictions on lenders, more costs to deal with EPA, and huge new costs from Obamacare for you staffs. Little goodies like leasehold depreciation are drops in the ocean by comparison. Keep your eye on what matters and not the small stuff.
The next several months are going to make America look like a banana republic. What just happened was just a practice run. The Economist has already said this week, that nobody in the rest of the world will listen to us anymore because we do not have a functional government and there is no leadership. Donít be mislead to think they will work it all out at the last minute, and all will be OK. If anything, the uncertainty is far greater now, and the prospects of a genuine agreement to reform taxes, reform entitlements and cut the deficit are far less. If you think you can forecast anything right now, you are fooling yourself. The ridiculous part is if they would just adopt Simpson Bowles, or a close similarity, the economy would take off, investment would sky rocket, and the revenues would be there to solve whatever the deficit reductions did not deal with. That is not what is going to happen unfortunately. †Obama and the left simply have no understanding of economics or investing, and all of us are going to pay a big price. Adjust your thinking and forecasting, and lower your return expectations to reality