We continue to believe that most of the fiscal cliff's impact will be avoided next year. We had hoped for a deal before year end, which would have lessened economic and investment uncertainty. However, a grip over the cliff looks increasingly likely and thus, tax rates will increase before congress acts. Republicans seem to believe the appearance of lowering most Americans' taxes after they go up, rather than raising taxes on a small percentage of high-income earners, will provide the political cover necessary to allow a compromise with the Democrats. We think there is little difference in the outcome except for a near-term loss of confidence (and an even lower opinion of Congress). The fiscal cliff is actually more of a slope, with the spending cuts and tax increases taking effect incrementally over time. If the fiscal cliff is resolved in the first few weeks of 2013, its economic impact should be minimal.
David Fuller's view I think this is about as favourable an assessment
as one can make over the inability of the White House and Congress to govern
in a manner which creates confidence. So far, markets have been reasonably relaxed,
albeit with the benefit of a massive quantitative easing (QE) tailwind, although
the S&P 500 (weekly & daily)
has been slipping beneath a lower high since 19th December.
As I see it, a lefty Democrat White House and an ideological Republican-controlled House of Representatives are refusing to agree on a sensible fiscal compromise (the art of governance) for reasons that probably do not matter all that much to the majority of US citizens. We have seen this before but it probably matters more this time, given the USA's runaway government debt.
Mr Bernanke's QE has postponed a reality check in the form of a sliding stock market, until recently, although the S&P 500 has been underperforming since October (see graph in The Weekly View posted above). Crisis-oriented US politicians are pressing their luck.
In a press release late this afternoon, the US House of Representatives has just announced that it will hold a session on the 30th, creating some optimism that a budget deal will be agreed before yearend. I certainly hope so because the USA's reputation as a safe haven has been diminished, judging from the relative performance of stock markets in 4Q 2012.
The US still holds the world's main reserve currency; it has mostly maintained its technology lead, and it now has a huge advantage in energy costs relative to other developed countries thanks to its successful development of fracking technology. Nevertheless, when evaluating financial opportunities in global markets, investors understandably take note of the trend of governance.