This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Looming Fiscal Cliff

NEW YORK ( TheStreet) -- I've not thought much about the "fiscal cliff," because I thought Washington wouldn't dare risk shooting the U.S. economy so unnecessarily in the foot. I imagined that long standing and dogmatic yammering of positions from both sides of the aisle were mere political rhetoric in an election year.

Now I'm not so sure.

The "fiscal cliff" -- the name for automatic spending cuts and the repeal of tax cuts that are set to take place at the end of the year if nothing is agreed -- looks far more likely an outcome than it did even a few weeks ago and would be a disaster for the stock markets as well as our economy.

The fading hope is that an agreement, or at least another compromise that puts off a full budgetary restructuring deal, can be found before the end of 2012 -- a presidential election year.

Surprisingly, that seems less and less likely particularly from the recent comments of Democrats, who have begun to talk about the fiscal cliff as an acceptable outcome -- see the recent writings of former Joe Biden adviser Jared Bernstein and former DNC Chairman and Vermont Governor Howard Dean.

This is some dangerous talk, even if the Democrats are playing some crazy game of economic chicken. The last time we saw both parties point their cars at each other and step on the gas, we got a last-minute deal on the debt limit and a downgrade of U.S. Treasuries -- lovely.

This time, there is a political argument that the Republicans are equally happy about seeing this disaster unfold: The prospect of capital gains taxes increasing threefold without a deal before the end of the year would precipitate the largest "tax-profit" selling spree of stocks ever seen, dropping the indices at least 10% to 15%, in my view.

Such a drop in the stock market would be a strong argument for the GOP that even the stock market is confirming a failed economic policy of the sitting president.

The question becomes: When does the investing public decide that not even a short-term deal is likely coming? When do they begin to lock in gains that they will pay 15% on instead of a possible 39.6%?

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%
YHOO $44.52 0.00%


DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs