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How to Prepare for the Fiscal Cliff
Fiscal cliff negotiations continued Thursday, but with Republicans not budging on their staunch opposition to raising taxes, and Democrats refusing any deal that doesn't include higher taxes, hopes for a compromise by year's end have waned.
Investors are worried, and rightly so.
In fact, the Wells Fargo/Gallup Investor and Retirement Optimism Index turned in a score of -8 in November, down from double-digit positive readings in early 2012. That means investors polled are back to being as pessimistic about the investing climate as they were a year ago when Washington was battling over the debt ceiling.
About 70% of investors polled said the fiscal cliff was already slowing the economy, and feared a deep recession would hit in 2013 if the economy fell off the cliff.
With no deal in sight, here's how investors can prepare for falling off the fiscal cliff.
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The Fiscal Cliff2Fiscal Cliff 2013: GOP Plans Retaliation
Republicans appear to be losing the fiscal cliff 2103 fight over raising taxes on affluent Americans.
Now they're threatening to retaliate by intensifying Washington's next battle: the U.S. debt ceiling.
Sen. Lindsey Graham, R-SC, pledged Republicans, who control the U.S. House of Representatives, would put up "one hell of a fight over raising the debt ceiling" next year if U.S. President Barack Obama succeeds in getting the tax increase for wealthy Americans without a plan to reduce the national debt. The country is approaching the $16.4 trillion debt ceiling.
On CNN's "Piers Morgan Tonight" Tuesday, Graham threatened, "There will come a time in February and March where we have to raise the debt ceiling. I will not raise the debt ceiling ever again until we get significant reforms, because if we don't reform entitlement we're going to become Greece."
If the country's debt ceiling is not raised, the fallout would send shockwaves across the globe, as the United States, with the world's largest economy, would face the prospect of default. That in turn could threaten global confidence in U.S. Treasury bills should there be non-payment.
In addition, exceeding the debt ceiling could mean the U.S. government would be unable to pay its bills, including salaries of federal workers, who could go unpaid or be laid off. That could have far-reaching effects, disrupting business and reducing consumer spending at a time when the economy can ill afford either prospect.
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The Fiscal Cliff4Tax Fight Remains Biggest Roadblock in Fiscal Cliff Deal
The fiscal cliff countdown clock tells us there is just 21 days left for Democrats and Republicans to come to some sort of deal.
With little resolved after months of back-and-forth discussions, which have recently turned into more heated exchanges, U.S. President Barack Obama has taken over the role of leading negations for his party, while Republican House of Representatives Speaker John Boehner is chief negotiator for the GOP.
The two men met for an unplanned White House meeting Sunday. Little details were made public regarding the powwow, but from duplicate statements from both sides, it doesn't appear much was accomplished.
The following messaged was delivered by White House spokesman John Earnest as well as an aide to Boehner. "This afternoon, the president and Speaker Boehner met at the White House to discuss efforts to resolve the fiscal cliff. We're not reading our details of the conversation, but the lines of communication remain open."
Statements from each side Monday made it clear core tax and spending issues remained unresolved, but both sides maintain they are waiting for details from the other side.
Democrats and Republicans are basically saying to each other, "it's your move."
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What the Fiscal Cliff Means for Investors
Beyond the rhetoric and posturing in Washington, what does the fiscal cliff mean for investors?
The phrase is usually accompanied by dire warnings about what will happen to the nation's economy if the country fails to avert the fiscal cliff.
Even talk about a possible compromise has sent shivers up investors' spines.
One compromise would cap the tax exemption on municipal bonds - a tax break in effect since 1913. That has sent investors in that segment of the bond market scurrying for cover.
The compromise would also raise borrowing costs for municipalities.
As Mike Nicholas, CEO of the Bond Dealers of America, told CNBC, "It's a tax on everyone."
Another more likely part of any compromise would involve raising the capital gains tax rate from the current 15% to perhaps 25% or more.
That prospect affected many high-flying stocks, including Apple Inc. (Nasdaq: AAPL), in which investors have large capital gains. Investors are selling Apple and other stocks before year's end to lock in the lower capital gains tax rate.
Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank in San Francisco, told Reuters, "You're going to see selling in the likes of Apple and other companies that have had good runs."
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The Fiscal Cliff Is Set To Clobber The Middle Class With Nearly 50% Tax Rates
If I didn't know any better, I'd think there's a small but growing group of people in Washington who think it would actually be good if we temporarily went over the fiscal cliff.
I say that because I am seeing a smattering of articles recently suggesting that somehow going over the cliff "won't be all that bad" or that we're "really just talking about cuts that need to happen in the first place."
President Obama seems to think the same way judging by the fact that he's dug in his heels, telling the GOP there will be no fiscal cliff bargain that doesn't include tax hikes.
Now noted budget hawk Republican Senator Tom Coburn has broken ranks, noting that he'd rather see rates rise because that "will give us a greater chance to reform the tax code and broaden the base in the future."
I find that to be an absolutely appalling argument given how much further the president's proposals will squeeze the middle class.
As Fox Business Network's Gerri Willis, an expert on consumer and personal finance issues, recently pointed out to me, the average middle class tax rate is already 43.12%, according to the non-partisan Tax Foundation.
Beyond that, Willis says if we do go over the cliff, the average middle class tax burden jumps to nearly 50%.
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Here are the Hefty Fiscal Cliff Automatic Spending Cuts
While much of the fiscal cliff debate has focused on possible tax increases, failure to reach a deal to avert the cliff could bring massive automatic spending cuts.
Barring an agreement between U.S. President Barack Obama and Congress, $1.2 trillion of spending cuts over the coming decade would begin taking effect Jan. 2.
The automatic spending cuts, known as "sequestration" - a result of Congress's 2011 negotiations to raise the debt ceiling - would total $109 billion in 2013, CBS News reported.
Here's a closer look at where the cuts would be targeted.
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Fiscal Cliff 2013: Why It's Looking Like No Deal
Expectations have changed lately regarding fiscal cliff 2013. It's looking increasingly likely that we are going over it.
U.S. Treasury Secretary Timothy Geithner, U.S. President Barack Obama's lead delegator on the fiscal cliff talks, told CNBC the Obama administration is "absolutely" prepared to go over the cliff if Republicans don't change their tune on taxes.
President Obama and Republican House Speaker John Boehner on Wednesday, along with Congressional Republicans, reiterated their stance on the fiscal cliff. No compromise was reached, with just 25 days remaining before zero hour.
President Obama maintains there could be a quick deal if Republican lawmakers withdraw their resistance to raising taxes for individuals earning more than $250,000 a year, swapping for concessions on federal spending cuts and entitlement reforms.
"If we can get the leadership on the Republican side to take the framework, to acknowledge the reality, then the numbers aren't that far apart," the president told "The Business Roundtable."
He added, "Another way of putting this is we can probably solve this in about a week. It's not that tough, but we need that conceptual breakthrough."
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How the Fiscal Cliff Deal Threatens Grover Norquist's Tax Pledge
Washington doesn't need any more hurdles than it already has in reaching a fiscal cliff deal.
But one man, and the power he holds over our elected officials, is trying to prevent a deal.
I'm talking about Grover Norquist, the founder of Americans for Tax Reform, and his tax pledge.
Norquist is both hailed and loathed for his "no new taxes pledge." It commits to never raising marginal income tax rates on businesses or individuals, and opposing any net reduction or elimination of deductions andcredits, unless matched dollar-for-dollar by further reducing tax rates.
Norquist's tax pledge has been signed by almost every Republican in office. Only four current House representatives and six senators have not signed it.
But lately, those who signed on have started to change their minds concerning the 20-year-old pledge.
You see, U.S. President Barack Obama has made clear that higher tax rates for the wealthy must be part of a fiscal cliff deal - something 95% of Republicans have pledged to oppose.
And now the need for a fiscal cliff deal has caused some high-ranking Republicans to reject the pledge, threatening to loosen Norquist's ironclad grip on the party's stance toward taxes.
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Everyone's Getting Antsy with No Fiscal Cliff Deal in Sight
After another day and still no progress on fiscal cliff discussions, many are beginning to think we might not see a deal before the end of the year, or even at all.
Republicans on Monday proposed their counter-offer to U.S. President Barack Obama's initial deal and, like his, it was basically the same plan previously offered.
This has led many, including Bank of America Corp. (NYSE: BAC) CEO Brian Moynihan, to wonder how far apart the two sides really are, and how long the effects of delaying a deal will be felt.
"I'm more concerned about business behavior slowing down than I am about consumer behavior," Moynihan told CNBC this morning. "I think we're in danger if this thing strings out into 2013 that you could start to have problems of what 2014 would look like."
The Republican-proposed deficit reduction deal, which was quickly rejected by the White House, would save $2.2 trillion over the next decade by generating an additional $800 billion in tax reform, but not by raising rates, and saving $300 billion by cutting discretionary spending, $600 billion in "health savings," $200 billion in changes to the consumer price index and another $300 billion in mandatory spending.
This is in stark contrast to the president's offer, and so far it seems neither side will budge from their original positions and even begin to compromise.
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Don't Bet on a Fiscal Cliff Deal
Fresh reports reveal that fiscal cliff talks have not resolved a thing as Democrats and Republicans continue to haggle over a deal ahead of the Dec. 31 deadline.
"Right now, I would say we're nowhere, period. We're nowhere," House Speaker John Boehner, R-OH, stressed on Fox News.
Last week it wasn't clear if a deal would be reached. This weekend the chances looked downright dismal.
Boehner, who is spearheading negotiations with U.S. President Barack Obama, told reporters last week that "no substantive progress has been made in the talks between the White House and the House over the last two weeks."
The Speaker's meetings last Wednesday with the president and Thursday's with U.S. Treasury Secretary Timothy Geithner were also fruitless, Boehner acknowledged. By Friday, Boehner said both sides were at a stalemate.
"I've got to tell you that I'm disappointed in where we are and disappointed in what's happened over the last couple of weeks," Boehner admitted.
He detailed on Fox News, "They won the election, (but) they must have forgotten that Republicans continue to hold the majority in the House. But the president's idea of a negotiation is, "Roll over and do what I ask.'"
The two sides, just rows apart on Capitol Hill, might as well be thousands of miles away.
Congressional aides, tracking the back-and-forth negotiations, shared with the Washington Post that it is growing increasingly more likely that no deal will be inked in time to avoid the fiscal cliff.
Or, as Sen. Lindsey O. Graham, R-S.C., said on CBS's "Face the Nation," "I think we're going over the cliff."
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