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Fed Buoys Stocks -- Until the Next Crisis

As a loyal reader of TheStreet for more than a decade, as well as a paid subscriber, I am honored to have been asked to become a contributor.

I am a principal and CIO of TEAM Financial Managers, a registered investment advisor with about $150 million under management. We launched our first mutual fund, TEAM Asset Strategy (TEAMX), in December. I manage our separate-account and mutual-fund strategies using a global macro absolute-return strategy, which is to say we are focused on generating competitive absolute investment returns on a calendar-year basis regardless of the market environment.

Our broad and flexible investment mandate allows us to capitalize on long and short opportunities across global stock, bond, commodity and currency markets. Since our separate account composite began at the end of 2003, we've produced positive returns in every year, including a 12% gain in 2008.

To start, here's my election commentary:

Despite the undeniable impact the Tea Party movement had on the well-publicized gap in energy between the GOP and Democratic electorate, I am skeptical that the fiscal hawkishness of the Tea Party movement will have a sustained impact over the new Congress. The GOP takeover of the House will result in the party now having to share political culpability for the continued economic and job market challenges.

This is likely to result in some action based on compromise with the White House, which I believe will result in the extension of the Bush tax cuts and renewed federal spending on infrastructure projects.

Some movement toward lowering the tax rate on repatriating the trillions of dollars of corporate cash could be marginally revenue-positive in the short term, but not enough to move the needle. I also see little desire to make meaningful entitlement reforms until a crisis forces action or permanent exit strategies from two foreign wars, which means that the major drivers of the growing fiscal imbalances are likely to be ignored. Sustained tax cuts and increased spending are not a formula to dramatically reduce the deficit.

Fortunately for the political establishment, the Federal Reserve is willing and able to facilitate larger fiscal deficits via the monetization of U.S. Treasury debt.

At the state level, the election results in California and New York are likely to result in those states reaching a crisis level at some point in the next couple of years. The dramatic fiscal holes in those states are unlikely to be filled due to their already high tax rates making higher taxes counter-productive, while the powerful influence of the public unions on the governing party in each state make meaningful pension reform unlikely. Once again, we are likely to see a situation where there is no political will to close the large budget deficits.
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