Petrified by the fiscal cliff? Relax, it's just a slope

U.S. President Barack Obama delivers a statement on the U.S. ''Fiscal Cliff'' in the East Room of the White House as Vice President Joe Biden (L) looks on in Washington, November 9, 2012.

Credit: Reuters/Kevin Lamarque

By Edward Krudy

NEW YORK | Sun Nov 18, 2012 8:08am EST

NEW YORK (Reuters) - The "fiscal cliff" sounds like a scary place. Headlines about "taxmaggeddon" are flashing on TV screens, next to clocks ticking down to January 1.

The Dow Jones Industrial Average has skidded more than 7 percent over the last month, largely due to concerns about the standoff in Congress over how to stop a barrage of tax hikes and spending cuts.

But some major investors say the doomsayers are getting too much attention and cliff watchers should relax a bit.

These investors argue that the U.S. economy does not face immediate disaster if lawmakers can't reach a deal by the end of the year, and there will still be time for Washington to come up with a deal in early 2013 before major damage starts to be done.

"It is not impossible at all that they miss by a little and then come back and get it," said billionaire investor Ken Fisher, whose firm Fisher Investments oversees about $38 billion in equities. "There's a minor risk ... but getting it done 10 days later is not really a big deal."

Others say Washington has more time than that.

Billionaire investor Warren Buffett, long supportive of higher taxes for America's super-rich, told CNN this week that lawmakers could have as much as a couple of months next year to reach a deal.

"The fact that can't get along for the month of January is not going to torpedo the economy," he said.

Chief executives warn of the damaging effects of uncertainty on their investment and hiring decisions. Many investors have focused on the risk of a new recession if the cliff is not addressed. And tumbling stock prices can add to the sense of panic and hurt both business and consumer confidence.

The Congressional Budget Office estimates that the tax hikes and spending cuts would amount to $600 billion in 2013 and could cause the U.S. economy to contract by nearly 3 percent in the first half of the year.

But that does not mean the pain begins automatically at the start of January.

For example, there could be a long lag, possibly lasting several months, between January 2, when the budgets of government agencies would be cut, and the actual implementation of those cuts to programs ranging from research grants to court room security.

On the tax side, the Treasury Department and the Internal Revenue Service have flexibility as to when to implement new, higher taxes. And even if higher withholding rates do take effect in January, they could be retroactively reversed later in the year.

In short, what has been dubbed a cliff is more like a fiscal slope that gets steeper as time goes on. How far the U.S. economy slides down it will depend on how quickly lawmakers in Washington take to do a deal.

A lot will depend on whether talks between administration officials and Congressional leaders can remain cordial and appear to be making progress, even if that progress is slow. They got off to what seemed to be a good start on Friday when both Democratic and Republican Congressional leaders came out of a meeting with President Barack Obama talking about the need for a deal, giving a boost to U.S. stock prices.

But some are skeptical. J. Dan Denbow, a fund manager at USAA in San Antonio, Texas, has been watching the value of his precious metals funds tank as fears of a U.S. recession dent the asset class. He thinks Congress will end up going over the cliff and that markets are in for a lot more volatility.

"Everybody's playing nice in the same sandbox," said Denbow of the recent round of cross-party meetings at the White House. "But they don't tell you what kind of cat fights they had behind closed doors."

KNIVES POISED, NO ORDERS TO CUT YET

Stephen Fuller, an economist at George Mason University, said it could take until the end of March before spending cuts begin to be implemented.

The government's budget managers appear to be in no hurry to take out their scissors.

The Office of Budget Management, the executive branch tasked with overseeing the cuts, has issued a report detailing how they will affect 1,200 government agency accounts. But breaking this down to a program-by-program plan is proving "challenging," given the scale of the task, the OMB said.

By the end of October the OMB had not advised agencies how to prepare for the so-called sequesters, or automatic spending cuts, according to a government budget expert who had talked to staff at OMB as well as agency budget offices.

The expert, speaking on condition of anonymity, said the OMB was still waiting for lists of programs from the Defense Department.

The agencies "would see the reduction in the funds that they have in Treasury immediately but obviously it takes a while for all that spending to occur so that's why people are talking about the fiscal slope in terms of the sequestration cuts," the budget expert said.

TAXING ISSUES

A more immediate concern in terms of the economic impact is the expiration on January 1 of the Bush-era tax cuts and the lower payrolls tax cuts which were introduced in early 2011. If they lapse, American consumers could see an immediate bite out of their take-home pay as tax rates revert to higher levels.

However, government tax lawyers, speaking off the record because they were not authorized to talk publicly, said the U.S. tax code gives the Treasury and the IRS some flexibility when deciding withholding levels appropriate to tax law.

If legislation was in progress to restore all or some of the tax cuts early in 2013 they might be able to hold off on increasing withholdings from paychecks, they said.

There is also the option of cutting taxes retroactively after the new higher rates have been introduced. This could end up in rates lower than current level to make up for any temporary payment of higher tax rates, giving a boost the economy once applied, experts say.

There may be further room for maneuver by U.S. tax officials.

Americans typically give more to the tax man than they need with each paycheck and end up getting a rebate after the end of each tax year. That may allow tax officials to refrain from applying at least part of any higher rates in early 2013, if a deal to restore lower tax rates appears close.

"My understanding is the law gives a lot of flexibility," said Bob Williams, an economist at the liberal-leaning Urban Institute and previously a tax specialist at the CBO.

Two years ago, Congress was in a similar situation when a fight over whether to extend the Bush-era tax rates for the wealthy went down to the wire. A deal was not reached until mid-December.

"They (the Treasury) didn't know that for sure and they didn't issue (instructions to raise taxes) right away ... and that turned out OK," Williams said.

(Additional reporting by Steve Johnson and Kim Dixon; Editing by William Schomberg and Eric Walsh)

View the original article here

U.S. leaders "not near finish line" on fiscal cliff talks: White House

ABOARD AIR FORCE ONE | Sat Nov 17, 2012 11:37am EST

ABOARD AIR FORCE ONE (Reuters) - U.S. President Barack Obama will meet with congressional leaders in the week after Thanksgiving to discuss ways to avoid the "fiscal cliff" of expiring tax cuts combined with massive spending reductions, the White House said on Saturday.

"Everyone expressed the desire to reach an agreement that reflected the shared goal of achieving a balanced approach to deficit reduction and that enabled the economy to continue to grow and create jobs," White House press secretary Jay Carney told reporters about Obama's meeting with top congressional leaders on Friday.

"There are a number of steps that I'm sure the president and leaders will consider but I don't want to characterize what that process will look like because we're not near the finish line, by any means," he said.

(Reporting By Jeff Mason; Writing by Lisa Lambert; Editing by Bill Trott)

View the original article here

Obama win has U.S. investors staring at fiscal cliff

1 of 4. Supporters of U.S. President Barack Obama cheer during his election night rally in Chicago, November 6, 2012.

Credit: Reuters/Philip Scott-Andrews

By Rodrigo Campos and Steven C. Johnson

NEW YORK | Wed Nov 7, 2012 3:18am EST

NEW YORK (Reuters) - U.S. investors will hit trading floors this morning with the same president and the same problems in gridlocked Washington. First up: a looming budget crisis that could send the U.S. economy reeling.

President Barack Obama beat back Republican challenger Mitt Romney to win a second term, but he will still have to contend with a Republican-controlled House of Representatives that could make forging a compromise on pressing issues like the coming "fiscal cliff" difficult.

"There will be an immediate shift to government gridlock and the fiscal cliff issue, and that will be a headwind for stocks," said Michael Yoshikami, chief executive officer and founder of Destination Wealth Management in Walnut Creek, California.

The fiscal cliff is a $600 billion package of automatic tax increases and spending cuts, scheduled to take effect at the end of 2012, that could severely strain economic growth.

Obama is expected to demand tax increases for the wealthy as part of a deal to reduce spending to tackle the nation's deficit. Many investors thought that Romney as president-elect would have had a smoother time in negotiations.

"The real challenge is for (Obama) to bridge the differences with Congress and work to get in the middle," said Jason Ader, a former Wall Street gaming analyst and a Romney supporter.

Steven Englander, Citigroup's head of G10 foreign exchange strategy, said markets could panic toward yearend if it looks as though no deal is imminent to avoid the fiscal cliff.

If that happens, investors will think twice about lending the U.S. government money at low interest rates, which would strain the economy, widen the deficit and hurt the dollar. It also raises the possibility that major credit-rating agencies will cut the U.S. debt rating.

Standard & Poor's stripped the U.S. of its pristine triple-A rating in 2011; the agencies have said they will evaluate budget negotiations and solutions and may take action next year.

Investors have had a tendency to downplay problems emanating from Washington only to find themselves surprised when lawmakers cannot get together on critical issues. The market reacted harshly to Washington gridlock after failed legislation to backstop the banks in 2008 and again during protracted talks to raise the U.S. debt ceiling in 2011.

Whitney Tilson, a hedge fund manager and one of the only managers in the $2 trillion industry publicly to endorse Obama for a second term, said he was optimistic that the two parties would compromise.

"This was a victory for moderates," he said. "I hope both parties recognize this and move toward each other - to the center - to address the pressing problems our country faces."

The end of the drawn-out election campaign puts to rest questions about regulation and monetary policy - Romney had said he would replace Federal Reserve Chairman Ben Bernanke - but some investors remained on edge about taxes and overall economic health.

Billionaire investor George Soros said late Tuesday that the re-election of Obama will open "the door for more sensible politics." Soros, a major contributor to Democratic causes, said in an email exchange with Reuters that he hoped "the Republicans in office will make better partners in the coming years.

CLARITY ON THE FED, LESS ON THE ECONOMY

Although markets came into the night expecting Obama to win, most traders and investors supported Romney, who raised more money on Wall Street than the incumbent.

Obama's win did remove uncertainty about the future of Fed policy. Romney had said he would replace Bernanke, whose dovish monetary policy has helped propel gains in both U.S. bond and stock prices in recent years.

The benchmark S&P 500 has rallied 67 percent since Obama took office - one of the most impressive runs ever for stocks under a single president.

Benchmark bond yields hit record lows despite a downgrade of the U.S. credit rating last year. Cumulative returns for maturities on all U.S. Treasuries are at 14 percent since Obama took office, according to Barclays.

The Fed's easy-money policy has pushed down the value of the dollar, though, and some worry more dollar weakness may be in store, particularly if investors see signs of rising inflation.

"The market rewards this certainty by bidding up gold and selling the dollar against all major currencies," said Axel Merk, president of Merk Investments in Palo Alto, California.

Under a second Obama presidency, Wall Street will have to forgo trying to repeal Dodd-Frank financial reforms and instead continue to use personal relationships in Washington to keep the law from harming firms, said Karen Shaw Petrou of Federal Financial Analytics, a Washington-based research firm.

Wall Street has bristled at the reforms, which include stricter capital requirements for banks, and the Volcker Rule, which is intended to stop banks from making bets in the financial markets with insured deposits.

But some welcomed the changes.

"I don't think any reasonable observer would want to go back to the risk that we had in the system before the financial crisis," said Evercore CEO Ralph Schlosstein.

(This story was refiled to restore punctuation in headline)

(Additional reporting by Tim McLaughlin and Svea Herbst-Bayliss in Boston, Atossa Abrahamian, Daniel Bases, David Henry, Rick Rothacker, Ryan Vlastelica, Sam Forgione, Nadia Damouni, Gregory Roumeliotis and Jennifer Ablan in New York; Editing by David Gaffen, Lisa Von Ahn, Prudence Crowther, Andrew Hay, Leslie Gevirtz and Ciro Scotti)

View the original article here

Re-elected Obama would push quickly for fiscal deal: party aides

U.S. President Barack Obama speaks at an election campaign rally in Columbus, Ohio, November 5, 2012, on the eve of the U.S. presidential elections.

Credit: Reuters/Jason Reed

By Thomas Ferraro

WASHINGTON | Mon Nov 5, 2012 9:18pm EST

WASHINGTON (Reuters) - If President Barack Obama wins re-election, he's expected to move quickly, perhaps within a day, to renew his bid for a bipartisan deal to avert a "fiscal cliff" that threatens to push the United States into recession, top Senate Democratic aides said on Monday.

A victorious Obama could reach out to Republicans as early as Wednesday and pledge that, with the election decided, it's time to find common ground to deal with the year-end expiration of Bush-era tax cuts and the launch of automatic spending cuts that would suck $600 billion out of the economy in 2013.

"He wants to get the process started immediately," one aide said. "We could move quickly," another aide said, explaining that the basic ingredients of any deal - increased tax revenues coupled with cuts in entitlement programs - have been debated thoroughly for the past two years.

"Everyone knows what needs to be done," he said.

Two Democratic aides said White House officials have discussed the matter with top Senate Democrats, though it remains unclear exactly how a re-elected Obama would proceed.

But as one aide said, the White House intends to move quickly because it "wants a big deal" before the current Congress adjourns in December. The White House had no comment.

If Republican challenger Mitt Romney wins, much of the work on a deficit-reduction deal that replaces the automatic cuts and reforms the tax code could be largely delayed until he takes office on Jan 20.

But Republicans in Congress would quickly launch an effort to delay the cuts and keep tax rates unchanged for six months to a year to buy time for a comprehensive tax reform deal.

House Speaker John Boehner said on Sunday that he would angle for a temporary "bridge" to allow the new administration and the next Congress to craft a solution.

'GRAND BARGAIN'

"I would think that would be the best you can hope for, and even that is going to be very difficult to do," Boehner, a Republican, told CNN in an interview in his home state of Ohio.

The Democratic aides said a deficit reduction deal would likely contain many elements from one that Obama and Boehner, the top U.S. Republican, came close to reaching last year as Congress wrangled over raising the federal debt limit. Both parties have talked about trying to achieve around $4 trillion in deficit reduction over 10 years.

Their elusive "grand bargain," which ultimately unraveled, would have included Democrats agreeing to cuts in entitlement programs, such as Medicare and Medicaid, in exchange for Republicans signing off on new tax revenues.

Republicans have vowed to oppose any increase in tax rates, while Obama has demanded that tax rates on income above $250,000 snap back to higher levels. Some Republicans have expressed willingness to allow increased revenues as part of tax reform by eliminating some tax credits and deductions, but these have not been identified, and they want to reduce tax rates even further.

"This thing has been litigated in Washington for two years," one of the Democratic aides said.

"The reason a compromise has been tough to come by is because Republicans have been holding back, hoping to take the Senate and the White House" on Election Day, the aide said.

On Monday, it was unclear if Obama or Romney would win the White House, with polls in a statistical dead heat. But the polls indicated an increasing likelihood that Democrats would retain the Senate, which it now holds by a 53-47 margin.

Most political experts expect the House of Representatives to remain controlled by Republicans.

"The kind of compromises that are needed are pretty much known at this point," one aide said. "It is just a matter of political will."

"I think the message of the election - if it returns the president and a Democratic Senate and a Republican House - is that voters want both sides to work together," the aide said.

"Republicans would be seen as not heeding the message of the election if they continue to refuse to compromise," one aide said.

Boehner did little to fuel hopes for such a middle-ground on Monday, reiterating his vow not to raise taxes on the wealthy and arguing that this would hurt job creation.

"Listen, our (House) majority is going to get reelected," Boehner said in an interview with Politico. "We'll have as much of a mandate as he will — if that happens — to not raise taxes."

Democrats and Republicans have until the end of December to reach a massive deficit reduction deal or see the expiration of all tax cuts enacted under former president George W. Bush for millions of Americans, both the rich and middle class.

In addition, $1.2 trillion in spending cuts would begin to kick in, delivering a blow to the economy that experts predict would lead to a recession.

The Senate Democratic aides said the administration opposes calls for a short-term fix, which would renew all tax cuts for six months or so while a comprehensive agreement is sought. "The White House is showing no sign of caving on this," an aide said.

(Additional reporting by Richard Cowan and David Lawder; Editing by Todd Eastham)

View the original article here