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With fiscal cliff fears hitting a fevered pitch, I had the chance recently to sit down with Ken Fisher and query him on his views of this widespread investor concern
Q: Will there be a fiscal cliff deal by year-end?
A: Can’t say. I can’t see into Mr. Boehner’s or Mr. Obama’s overtly political hearts or minds and don’t want to. But if there’s no deal, it’s not a crisis. The fiscal cliff is fake. A political invention, arbitrarily put at January 1 because it was politically expedient in 2010 to stick it there. Now it’s politically expedient to push it past the 2014 elections. Democrats have more to lose in 2014 than is commonly perceived now and they’ll want to compromise.
Q: Is time running out?
A: No! The fiscal cliff which is really more of a fiscal rolling plain has many moving parts that don’t hit all at once. Spending cuts are already underway and will happen piecemeal, allegedly, over the year. The higher taxes, many of them, aren’t due until April of 2014. Maybe this impacts withholding levels if a deal is struck later—folks have to adjust them then adjust back.
What could happen is Mr. Boehner and Mr. Obama say, “Now we declare we have until February 28 to solve this issue.” They did the exact thing before with the payroll tax—arbitrarily moving the arbitrary deadline to buy time for a longer arbitrary can-kick. This is political. It’s fake. They made the rules, they can and will change them.
Q: If there’s no deal, how do you think government spending cuts impact investors?
A: People make two errors here. First, they think growing government spending is critical to a healthy economy. Wrong. Falling government spending detracts from headline GDP numbers, but GDP doesn’t perfectly reflect economic health. The private economy has been doing very well since 2009—better than most realize. Profits are near all-time high. Business spending is robust. Consumer spending is past the pre-recession peak. Incomes are growing. It’s true unemployment remains high, which no one wants. But unemployment lags economic growth, always. That started sometime before the first recession Christ lived through.
The second error is they don’t bother checking data themselves. Total government spending actually dropped a hair in 2012, and nothing terrible happened. GDP wasn’t rip-roaring, but re-accelerated mid-year. It was fine. In 2013, if you believe the plans, with the “cliff” government spending actually drops less than it did in 2012 if nothing changes. Starting in 2014 and forever after, government spending grows as it always does. From a spending standpoint, we already went off the fiscal molehill and it was fine. Not Armageddon.
Q: If current tax rates rise, what’s the market impact?
A: This is a case where the fear of the thing is so much bigger than the thing, it can’t be anything but bullish.
In the long history of income taxes in the US and overseas, there have been a great many rate jiggers. Same is true on capital gains taxes and every other form of tax imaginable. People simply do not want to believe this, because it goes against something that seems commonsensical. But there’s no clear pattern—zero—that when tax rates rise, stocks do badly (or well). Or if taxes get cut, stocks must do great. What’s clear to me from studying this is, whether you raise taxes or cut them, stocks want to rise much more than fall and will do what they were going to do anyway.
But to believe tax rates have a big darn impact on market direction you have to ignore the many, many other more important things simultaneously acting on stocks. And you have to ignore the 77% of non-US global GDP. I don’t like higher taxes because I think the government is a stupid spender of money. But I don’t fear the capital markets impact from a marginal shift in tax rates in a single country.
Q: So how is that bullish?
A: When I see big fear of potential tax hikes like now, I know that’s bullish. First, either the tax hikes don’t happen, or they’re not as bad as feared. Anyone can see how if a feared tax hike doesn’t happen, that’s a positive factor. But even if tax hikes happen as feared, vast history tells me it doesn’t have to have the big bad impact folks fear. And fear of a false factor is always bullish.
* In the interest of full disclosure, I work at Ken Fisher’s firm. Ken and I have also co-written 6 books together, and we’re working on our seventh.
Plan Your Prosperity by Ken Fisher (CEO of Fisher Investments) and Lara Hoffmans is available now.
This constitutes the views, opinions and commentary of the author as of December 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.
Although I concur, that the fiscal cliff concerns are not substantiated, my only highlighted correction to this article. Mr. Obama is President Obama. President Obama is the leader of the free nation of The United States of America and is to be respected and honored for this important roles on planet Earth.
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