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Kass: 15 Surprises for 2012

Surprise No. 3: Former Presidents Bill Clinton and George Bush form a bipartisan coalition that persuades both parties to unite in addressing our fiscal imbalances. The Clinton-Bush initiative, also known as "Simpson-Bowles on steroids," gains overwhelming popular support, and despite strenuous initial opposition, it forces the Democrats and Republicans (months before the November elections) to move toward a grand compromise on fiscal discipline and pro-growth fiscal policy. Interest rates remain subdued, growth prospects become elevated and a feel-good atmosphere begins to permeate our economy in a return of confidence and in our capital markets engendered by the Clinton-Bush initiative.

The Clinton-Bush initiative includes seven basic core policies that are accepted by both political parties.
  1. A broad infrastructure program focused on a massive build-out and improvement of the U.S. infrastructure base -- the restoration of our country's highways, bridges and buildings and an extensive internet bandwidth expansion are embarked upon.
  2. The annual increase in government spending is limited to the change in the CPI.
  3. A comprehensive jobs plan includes new training programs -- all veterans are made eligible to tuition subsidies to vocational schools and colleges.
  4. A Marshall Plan for housing is introduced, highlighted by a nationwide refinancing proposal adopted for all mortgagees (regardless of loan-to-values).
  5. A series of new tax increases, including a plan to raise taxes on the families with an income in excess of $500,000 a year (a two-year income tax surcharge of 5%-10%) and some other more imaginative, outside-the-box proposals (e.g., a tax on sugar products) are introduced.
  6. Mean test entitlements, freeze entitlement payouts and gradually increase the Social Security retirement age to 70 years old.
  7. A comprehensive plan is designed to rapidly develop all our energy resources.

Strategy: See No. 1 surprise strategy. Sell volatility.

Surprise No. 4: Despite the grand compromise, the Republican presidential ticket gains steam as year progresses, and Romney is elected as the forty-fifth President of the United States. The U.S. moved to the left politically in the Democratic tsunami in 2008 and to the right politically as the Republican Party gained control of Congress in 2010; the 2012 election is the tiebreaker. The result of the tiebreaker is that Mitt Romney and Marco Rubio squeak by Barack Obama and Joseph Biden in the November 2012 election. All the five swing battleground states (Florida, Indiana, Missouri, North Carolina and Ohio) go Republican. The Romney-Rubio ticket also wins the states of New Hampshire and Virginia, previously won by Obama in 2008, and the Republicans prevail (270 electoral votes to 268 votes) in one of the closest elections of all time. ( Here is a great interactive electoral college map that allows you to make your own predictions.)

Strategy: See No. 3 surprise strategy.

Surprise No. 5: A sloppy start in arresting the European debt crisis leads to far more forceful and successful policy. The EU remains intact after a brief scare in early 2012 caused by Greece's dissatisfaction (and countrywide riots) with imposed austerity measures. The eurozone experiences only a mild recession, as the ECB introduces large-scale quantitative-easing measures that exceed those introduced by the Fed during our financial crisis in 2008-2009.

Strategy: Buy European shares. Buy iShares MSCI Germany Index Fund (EWG) and iShares MSCI France Index Fund (EWQ).
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