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The Financial Cliff


The pressure is on in Washington. With President Obama returning to office and signs that some Republicans understand that the party’s ultra-conservative mindset does not resonate with the majority of Americans, it would seem the stage is set for meaningful solutions about the country’s bludgeoning debt. Congress will either follow the Obama lead or the country will fall off the fiscal cliff on December 31. 2012.

Given the erratic record of the Republican House, Americans are edgy about the possibility of a solution to a dilemma that could sink the economy. There is no historical support to think that Congress can coordinate a long-term solution to this pressing problem and place the country’s best interests ahead of their personal own politics.

The House of Representatives will once again attempt to hold Americans hostage, but this time they are negotiating with a President who will not be running for another term and who is committed to represent the middle class, or what is left of it. Analysts have suggested that a temporary debt reduction plan might be implemented but this would be the ultimate kick the can strategy. Americans expect meaningful action.

Three Wings of Fiscal Cliff

The fiscal cliff includes three main components. The temporary payroll tax reduction, the expiration of the Bush Tax cuts and $600 billion in spending cuts are in place to activate on the last day of the year. If negotiations about a remedy are not successful, every American taxpayer will have a heavier burden next year. This will dramatically cut back on consumer spending and severely hurt the Gross Domestic Product (GDP).

The payroll tax reduction has helped many Americans survive the recession and timid recovery. This reduction will most definitely expire.

The $600 billion cuts will cause loss of jobs and send shock waves through the economy. If a debt reduction plan is not in place by December 31, the defense department will suffer the biggest cutbacks.

Bigger Package Needed

As important as avoiding the fiscal cliff is, the country needs a substantial debt reduction plan. The most viable framework for a meaningful debt reduction initiative is the Simpson-Bowles, $4.6 trillion plan. While Simpson-Bowles is an aggressive approach to reduce the deficit, the country needs an even deeper plan.

Americans are exhausted with the dysfunction that has come to symbolize Washington. At a time when the US needs a balanced approach to reduce the debt, the Republican based Grover Norquist Pledge which opposes all legislation with a tax increase, could be the biggest fly in the ointment.

Two other flies in the ointment are Republican Vice Presidential candidate Paul Ryan, whose fiscal approach probably cost Mitt Romney the Presidency and Republican leader of the House, Eric Cantor. Cantor and Ryan have signed the pledge and cannot be relied upon to have any meaningful input in the negotiations. Frankly, the country would be better off if these two thugs were not re-elected.

The only hope to get a substantial deficit reduction plan in place lies with moderate Republicans, a dying breed in Washington. There are signs that the Senate is agreeable to a plan that crosses the aisle. The Congressional Budget Office reports that if a remedy for the fiscal cliff is not resolved, the economy will shrink by 0.5 percent during 2013. More importantly it is very possible that 5 million or more jobs will be lost in 2013, an outcome that apparently is acceptable to Cantor and Ryan. The country will find itself in a deeper recession than the previous recession.

David Cote, CEO of Honeywell explained the intense need for cooperation and action. “If the last debt ceiling discussion was playing with fire, this time they’re playing with nitroglycerin. If they go off the cliff, I think it would spark a recession that’s a lot bigger than economists think. Some think it would just be a small fire. I think it could turn into a conflagration.”

On Wednesday, President Obama met with a number of CEOs. Many of these CEOs are unsympathetic to the gridlock in Congress. Several major corporations have said they are hoarding cash and unwilling to invest in the US in the current political and economic climate. That possibility is another consequence of the fiscal cliff. Some of the country’s biggest corporations will invest in enterprises in other countries.

When the Bush Tax Cuts were introduced as a temporary tax reduction plan. They have been renewed every year since. The President ran on a platform of increasing the tax rate for workers who earn $250,000 or more. Ryan and Cantor are vehemently opposed to this approach despite the fact that many of the country’s wealthiest individuals have said they were amenable to the proposal.

Republicans favor changing the deductions, such as the interest paid on mortgages and other changes to add revenue. At a time when the country desperately needs positive news on the housing crisis, eliminating the deduction for interest would cripple the housing market further.

Just as Republicans did during the election, they continue to step on themselves. MSNBC reported that 60 percent of persons interviewed in exit polls favored tax increases for the nation’s wealthy. It is time for Congress to put their differences aside and negotiate in good faith for a long-term solution.

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All Eyes On Bernanke As Economy Becomes Reliant on Washington


U.S. equity markets closed flat on Monday in the lightest trading day of the year. About 7 billion shares were traded, well below the daily average of 9.65 billion. Along with the central bank’s discount rate hike, several other credit-tightening measures, announced last week, have raised investor concerns about the Federal Reserve’s intentions. However, overnight news that the Senate cooperated in passing a jobs creation bill stirred overnight market activity.

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Dennis Calijas of Lind-Waldock in Chicago summed up investor mindset: “People are still trying to figure out what the intentions of Bernanke are, moving forward.” The concern emphasizes how reliant the American economic environment has become on Washington. The Fed’s looser monetary policy brought about significant gains in equity markets in 2009, but indications are a belt tightening is at hand.

As President Obama put forth a revised health care initiative on Monday, the political bickering in Washington continues to weigh on national and global markets. Healthcare stocks rose but the shift away from reform has benefited stockholders.

On Monday the Dow Jones lost 18.97 points, the S&P 500 Index lost 1.16 points and the Nasdaq Composite Index fell 1.84 points. The S&P Energy Index closed up 1.2 percent.

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All eyes are focused on Federal Reserve Chairman Ben Bernanke’s testimony before the House and Senate on Wednesday and Thursday. The stakes are high. Investors have enjoyed unusual liquidity and the discount rate hike is viewed as just the first of many credit-tightening measures. Later this week, the U.S. Commerce Department will release the GDP report. If reports show continued growth, investors foresee the belt will tighten further.

Oil Busts Through $80 Barrier

Buoyed by a refinery strike in France, oil broke through the $80 per barrel level and appears headed north.  The announcement that Iran intends to commence construction of 10 new nuclear enrichment plants also influenced pricing. Two of the Iranian plants could start construction later this year.

U.S. crude for March delivery settled at $80.16, a 35-cent increase. The price is the highest front-month contract since January. Monday marked the fifth consecutive gain for U.S. crude, up 8.13% during the span. Monday activity continued the longest winning streak of 2010.

Some of the increase may be due to expected travel increases in upcoming months, but the biggest factor is clearly the lack of production from France. Approximately half of the country’s refining capacity has halted. Only one million barrels per day are in production. French motorists swarmed retail outlets. The repercussions from the strike will take a heavy toll on supply by the end of the week.

The world’s second largest oil consumer, China, reported increased demand in January. The country processed 30.14 million tons of crude in the month, an increase of 29% from a year ago. The dollar gained strength but the mitigating circumstances outweighed the currency increase.

“Markets are set to remain volatile in the week ahead due to the line-up of economic data and in particular Friday’s GDP reading as players look for signs of continued growth as the Fed begins to reign in its emergency measures” declared James Moore of the BullionDesk.com.

$15 Billion Jobs Bill Gets Senate Nod

In a surprising overnight move, 5 Republicans, and 2 independents joined 55 Senate Democrats in support of a modest $15 billion jobs creation bill aimed at cutting taxes and stepping up highway spending.  Rebuilding the country’s infrastructure is viewed as a worthwhile means to trim unemployment.

The key initiatives in the bill include:

  • A tax credit for businesses that hire unemployed workers.
  • Subsidies for state and local construction bonds
  • Money to shore up a highway-construction fund
  • Provisions to reform offshore tax shelters.

The bill is expected to add or save 1.3 million jobs. The bill, although a small step forward, signals a possible change in the political climate in Washington. The President has called for a spirit of cooperation and while that may not happen with health care, improving upon the 20% underemployed rate in the country will ease some of the economic pressure.

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Legislation authorizing $155 billion in job creation spending passed the House in December. The passage of this smaller bill is seen as the first of many similar remedies. All ongoing legislation will require more bi-lateral cooperation between members of the Senate. The parties continue to ignore the public outrage with Washington’s handling of the recession.

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