Todd M. Schoenberger
Whew, that was close!
With only two weeks to go, which includes two key holidays, our trusted lawmakers on Capitol Hill burned the midnight oil and “agreed” to extend the Bush era tax cuts for two more years. The immediate result will be no new taxes taken out of your first paycheck in the new year, but the long-term impact may be less advantageous.
In order to get the deal done, both sides had to agree the loss in tax revenue would be added to the national deficit rather than a cut in spending. The nation’s ballooning national debt currently stands at $13.8 trillion.
Brookings Institution fellow Isabel Sawhill wins the quote of the night when describing the tax package: “as usual, all candy and no spinach.”
She’s absolutely right and what happens when you eat too much candy? Your teeth fall out and you look like a boxcar hobo, which could very well be the end result for many Americans in years to come.
First, as important as it was to extend the current tax schedule, it’s probably more important to address the out-of-control spending ways of Congress. Fortunately, the GOP will be leading the charge to cut government spending when the party takes control of the House next month; but the realistic outcome will be continued political posturing with the threat of a government shutdown (although, that’s not so bad).
The hope, and I am not a fan of using that word, but, hope is in the cards that by extending these tax cuts employers will be more willing to hire. Personally, I have a hard time understanding how taking something that we already had will lead to job creation when lending standards and access to credit are tighter than they have ever been before.
Second, the hopeful outcome from Benny and the Fed’s latest and greatest quantitative easing package is to spur hiring. What happens if and when it doesn’t happen? That’s obviously an easy answer: QE3, 4 and 5! It’s starting to sound like a Dr. Seuss book.
Just like Ethan Harris, Bank of America Merrill Lynch’s Economist, said to me on Tuesday at the NYSE: We’re not going to address the tax package two years from now; it will happen one year from now when the unemployment extension and payroll tax ‘holiday’ expires. What happens if the labor market doesn’t improve by then? More borrowing!
For investors, this is what you need to know: Adding to the deficit is not good for bonds, so look for fixed income—especially Treasuries—to trend lower into 2011. Stocks, on the other hand, may actually do well over the next couple of quarters.
Believe it or not, inflation will be better for companies—particularly the ones that aren’t hiring—because their margins will continue to improve with elevated prices for the products and services they sell. This helps the bottom line, which, in turn, helps stocks.
It’s when the bottom line gives out and investors will say ‘look out below.’ But, until then, enjoy the ride and have a wonderful and safe weekend. And, as always, thank you for being part of the LandColt Trading Community!
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