Told You So (Too Soon?)

It’s been a rough few weeks for the folks I love to mock.

The Mayan doomsday fell short of expectations on December 21st, a non-event so non-eventful as to be even more dumb than the usual
doomsday hysterics… like whatever was supposed to happen on 12-12-2012.

Oh, and of course, at the final hour, the much vaunted Fiscal Cliff lived up to be exactly what I expected…

…a high drama performance by all concerned in a theater of the absurd.

Vice President Biden got to step out of his gaffe-aholic routine save the day.  One marvels at the irony.  The village idiot successfully herds the cats in Congress when on most days it seems he can’t discern where he is or whom he is addressing.

But if you are a regular reader, you could have safely ignored the media’s Fiscal Cliff hysteria just as surely as the Mayan calendar nonsense.

Is it too soon to say I told you so?

Betting on politicians kicking the can on tough fiscal choices is about as hard as predicting that a scorpion will once again sting the frog.  It’s in their nature.

Full disclosure requires that I admit that I did doubt my certainty of the outcome when in recent weeks word was that Obama was eager to tank the deal.

Not wanting to underestimate the mendacity of Obama and the newly emboldened Democrats, I held out the possibility that they’d go full ‘Thelma and Louise’ and hang the Fiscal
Cliff on the beleaguered Republicans still reeling from Romney’s decisive loss.

After all, the Democrats did brazenly pass Obamacare over the clear objection of the American people and were willing to lose their House majority over that power grab so I’ve
learned to allow for extraordinary measures from that bunch.

For that plan to work, however, John Boehner would have to have a spine.

Alas, as I expected, the allegedly intransigent GOP House gave Obama too much of what he was asking for to sell the ‘blame the Tea Party’ angle and the Democrats backed down, too.

It has been credibly argued that the GOP actually did about as well as they could given the circumstances, and I’ll explain some reasons why in a minute.

But despite the reputation Boehner enjoys on MSNBC, he’s clearly not interested in walking away from the negotiating table having passed a workable deal in the House and letting
Obama actually have to craft a credible alternative.

Instead, the Republicans have now agreed to let taxes go up for approximately 77% of Americans via the Payroll Tax cut expiring and the higher rates to hit those making over
$400,000 in exchange for making the Bush Era Tax Cuts permanent for 98% of Americans.

You won’t find any entitlement reform or actual spending cuts in the deal, however.  Par for the way these deals have played out every single time in post-war history, spending cuts are
even more mythical than unicorns though the foolish continue to believe in both.

Hardest hit by the faux deal? Small Businesses.  Oh well, tis the price of HopenChange Part II my friends.

It seems that neither Obama’s base nor the GOP’s base are at all happy with the deal, but that’s hardly news.

It’s rather strange actually that the Democrats allowed 98% of the Bush Tax Cuts to become permanent, the Estate Tax won’t hit anyone under $5 million and capital gains tax rates remain for all but the most wealthy.  The Republicans couldn’t make Bush’s Tax cuts permanent even when they had the majority, so go figure.

What’s even more strange is that the Republicans failed to mention even once that the middle class would be hit by the tax increases in Obamacare.  The public still overwhelmingly dislikes Obamacare and it would seem to have been an obvious card to play.

Well, whatever the GOP’s reasons for taking such a strong card off the table the coming year will feature a series of nasty surprises as those very tax increases and other toxic features of Obamacare go into effect.  By 2014 my guess is the Democrats will wish that the Republicans had succeeded in repealing Obamacare because it remains an unworkable patchwork law and an economic wet blanket of epic proportions.

That’s a topic for another time, but for now the markets are basking in glow that a muddled deal went through at all.

Dark clouds are near on the horizon none the less and bulls who bought this rally are going to be very, very sorry.

Soon all we’ll be hearing about is the debt ceiling fight, in which Speaker Boehner will have a fresh opportunity to join Minority Leader Mitch McConnell to cave in style.

No one really expects the GOP to allow a government shut down, but the stakes are high and the risk of massive market moves to the downside is a near certainty.

For now, the highlights of the Fiscal Cliff deal are weak sauce for an anemic economy and do exactly nothing to reduce our punch drunk spending binge.

Bonds have been hit hard and Gold is frankly all over the place.  Chaos reigns.

The stock market, apparently willing to rally for any cause at all on the slightest provocation has launched into the stratosphere putting our anticipated Santa Claus rally in jeopardy of ending sooner than expected.

Here’s the reality.  Unemployment is locked in at 7.8%, a very sad number historically, but now the new normal without so much as a pause for the market’s advance.

According to the Wall Street Journal 2012’s holiday shopping season was a disappointment.  Strong sales at Thanksgiving essentially cannibalized Christmas and what sales there were
occurred at discount prices and online.

Costco apparently was the biggest winner with same store sales at 8% over the 5.1% expected.  The lesson overall from the most important shopping season of the year is that consumers had a fixed amount to spend and even massive discounts didn’t spur more spending beyond what they’d already budgeted.  In other words, much of Christmas shopping was done on Black Friday sales after Thanksgiving.

As traders and investors, we must observe with clear and open eyes what is unfolding and how best position for profit.

For 2013 we’re expecting the rally in stocks to take a breather and sell off into February.

Bonds are at historic highs and the biggest play of the year may well be a brutal increase in interest rates as government debt gets traded for higher rated corporate bonds and double
digit dividend yield stocks.

Stay tuned because there is a fortune to be made in this Mad Hatter economy and the markets are poised for dramatic swings yet again this year.

Good Investing!

David K. Miller
Managing Editor,

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