How Many More?

Daily State of the Markets
Wednesday, December 12, 2012

Good Morning and Happy 12-12-12 (the last of such “magic numbers” of this century) to all. If there was any doubt at all as to what the U.S. stock market is focused on these days, Tuesday’s price action made it clear – as in Tom Cruise, A Few Good Men, “crystal” clear. Stocks started higher yesterday on a WSJ report that the private budget negotiations between President Obama and House Speaker Boehner have progressed steadily in recent days and that talks had become “more serious.” Boom… the S&P 500 opened higher by more than +0.5%.

Never mind that Greece’s debt buyback deal had fallen a smidge short. Forget the brand new political drama in Italy or the recent rate contagion. And toss aside the fact that the NFIB Small Business Optimism Index had seen its biggest monthly drop in, well, ever. None of it mattered as this day, like all days recently, was about the fiscal cliff.

With traders starting to get the warm fuzzies about the potential for a deal to be done BEFORE the U.S. dips into another recession, stocks were seen movin’ on up in the early going. And although there really wasn’t much hard data to work from, the fact that the negotiations between Boehner and the President were being kept private by both sides was viewed as a positive. After all, if neither side was running to the nearest microphone every 15 minutes, some real progress might be occurring, right?

But then the politicking returned – and along with it came the knee-jerk, algo-driven responses to the headline. Causing me to opine via IM to my team yesterday, “How many more days of this sh&# do we have again?”

First it was Speaker Boehner who wound up challenging the President to respond to the GOP’s self-proclaimed balanced plan instead of the current “slow walk” that Obama has favored of late. Of course, the President had just returned from the campaign trail, er, oops, I mean meeting, where he had proclaimed that he had run – and won – on the idea of taxing the rich.

Taxing The Rich Is The Answer, Right?

But before we continue with the day’s drivers, I’d like to spend a moment on this idea of taxing the rich. Frankly, this issue doesn’t make a lot of sense to me. First, I’m not sure how taxing some people more just because they can potentially afford it more easily than others qualifies as “tax fairness” (if I recall properly, the top 10% already produce approximately 80% of the nation’s tax revenue). But more importantly, the math on this is downright comical. Thus, I just don’t get why the idea of taxing the rich is SO important to this administration.

Here’s the deal. While raising the tax rates on the rich would indeed appear to be a major political victory for the Dems, it only raises $40 billion a year. Yep, that’s right, according to Erskine Bowles, who was President Clinton’s Chief of Staff and is co-chair of President Obama’s Deficit Commission, increasing the highest rates on the top 2% of earners only produces $40 billion a year. And in Bowles’ own words, the problem is that the country is facing budget deficits of more than $1 Trillion a year for “as far as the eye can see.” As Bowles put it, Washington has a spending problem, which is simply not being addressed by all this talk about raising tax rates on the rich.

So, let’s pull out the calculator and do the math. If memory serves, last year’s budget deficit was something on the order of $1.4 Trillion. And just to be clear, that means the government spent $1.4 Trillion more than it took in – and had to borrow that $1.4 Trillion in order to pay for everything.

My calculator says $1.4 Trillion minus $40 billion is… drumroll please… $1.36 Trillion. So, all this fuss about taxing some folks (because they won’t mind, they can afford it after all) and not others doesn’t amount to much more than a rounding error in terms of the CURRENT budget deficit. Even after the big political victory for the administration, the budget deficit still has a T-handle on it. So from my perspective, it would appear that we need to talk about something more than just soaking the wealthy for more money. But then again, maybe I’m the only one that sees it that way.

Getting Back To The Game

The good news is that the President does appear to recognize that spending cuts (or more accurately a reduction in the amount of spending increases each year) are a necessity. And the really good news is that Obama also appears to be willing to compromise on some issues – as long as he gets his tax on the wealthy.

It was also good news that influential Republican Senator Bob Corker of Tennessee effectively said over the weekend that his party could live with an increase in the tax rates on the wealthy if it meant that we could get to the really important stuff – the reform of entitlement programs and the tax code.

Thus if you connect the dots, you could make the argument that a deal just might be possible and perhaps even sooner rather later. And this is why the DJIA was sporting a triple-digit gain for much of the day on Tuesday.

But then Senate Minority Leader Harry Reid decided to play scrooge. At about 2:30 pm eastern, Reid fired off a series of political volleys that quickly gave traders reason to pause. Reid opined that it would be tough to reach a deal before Christmas and that the Democrats would NOT offer a plan for spending cuts. The thinking here is the Dems would make their opponents be the ones to tell the American public that they can’t have everything under the sun anymore. Oh, and then Reid finished big with, “The Republicans are holding the middle class tax cuts hostage.”

The algos were ready and knew what to do with that, so down stocks went. But then near the close, we got word that Boehner’s office was in the process of providing a counter to the President’s counter of the Republican’s plan that would include clarification on what specific cuts would be made in the GOP’s plan. And as you might suspect, stocks rallied on the news.

And so it goes. If anyone else out there finds this myopic focus on all things cliff exhausting (among other words), you can probably understand why I wondered aloud yesterday afternoon how many more of these days we are going to have to endure. And after the appropriate websites were located, I found that the “cliff clock” says the answer is now nineteen days and counting.