The Fiscal Cliff Rhetoric has begun!

by Wayne Ferbert on November 9th, 2012


Let the gamesmanship begin! Obama is speaking right now and he fired the first shot in the fiscal cliff negotiations and it is not encouraging. He says, " since the Republicans agree that the middle class should not see a tax increase, they should extend the Bush tax cut for the middle class now. Why wait?"

Obama characterizes it as "punting" the issue on the Bush tax cuts for the wealthiest earners until later. But it is a trap and the Republicans know it. If they do not address the  tax rates for the wealthiest at the same time, the Republicans lose their leverage on the issue. Would Obama really have an incentive to address it later? No. He will declare victory on his campaign promise and move on.

It won't be that easy - believe me. Lets remember that the Republican congressional leadership doesn't trust this president after the failed negotiations last year on the deficit. This issue was already negotiated once - and the dynamics of the negotiating positions will not likely change much.

If you want to read about the last negotiation as color for the upcoming negotiation, read Bob Woodward's latest book: The Price Of Politics. It is an excellent book and provides very interesting color on how these negotiations will proceed. Lets remember - all the same people kept their political office so the same people will be negotiating now.

In fact, the Republicans tried the same tactic with the Democrats in the last negotiation. They said: "if we all agree that these spending cuts are necessary and the right cuts, why don't we just do them right now. Why do we need to tie them to tax revenue? They are either good ideas or they aren't." 

But the Democrats stood their ground and said they had to have revenue increases to go along with the spending cuts. They needed it as "political cover". Well, the same holds true now on taxes. The republicans will not give in on middle class tax cuts without something in exchange.

Why is all of this relevant now for investors? You should know that these differences and this "who is gonna blink first" rhetoric is what makes the fiscal cliff more likely to be breached.  They are sitting in the same seats with the same political views of last year with the same issues. The only difference is that the tea party is a little less influential this go around. That will not be enough to make the difference.

These guys are still miles apart on taxes and spending. The only way to satisfy both parties will be tax reform which will take longer than 6 weeks before our deadline. Hopefully, they can come up with a compromise that bridges them to a tax reform conversation.  If they don't, the market volatility will get even worse.


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