Market Overview

David Kotok on Why We Need to Go Over the Cliff

When might an individual with serious personal problems decide to make necessary change in his life? When they reach the depths of hell and decide “it does not need to be this way and it won't any longer.”

How about a nation? Is there any doubt our nation faces enormous problems, fiscal and otherwise?  The manner in which we confront these problems will have a profound impact on our nation for generations. Will Washington swerve and avoid the fiscal cliff that some believe will lead us into a hellacious recession or are we better off actually experiencing that so as to finally wake up and make the necessary change? Are we even capable?

David Kotok of Cumberland Advisors provides pearls of wisdom on this topic in response to a question posed to him, “what would you like see happen with the fiscal cliff?” 

Let's navigate as Kotok writes,

Numerous readers have emailed and asked me a personal question:  “What would YOU like to see happen with the fiscal cliff?”  We thank you for the question.

Please remember, this missive will not be about what is going to happen.  We do not know that outcome and neither does anyone else.  We hold an opinion that there is a deal coming.  We think it will be at the 11th hour or even early next year after we tumble over the January 1 cliff.  But that is just an informed guess.  President Obama didn't add much clarity to that view in his Bloomberg interview today.  Readers may see it and hear it on Bloomberg.com.

Instead, today's letter is about what we would like to see happen, and why. My view is simple: until we experience the cliff, we will not understand what it really means.  Hence, we will not act wisely if we do it prospectively.

We believe the markets and citizenry are too complacent about our government.  US investors are used to watching the Washington charade.  Voters, in nearly every congressional jurisdiction, are trapped by limited choices, which is why we re-elect most incumbents.  Our politics are the politics of default choices.

Our markets are driven by forces such as low interest rates and global demand and geopolitical risk.  We go on about our daily business in spite of our broken government.  We engage in a collective trillion economic decisions each and every day, without government help.  Leave us alone and we can pretty much figure out what to do.

We have a broken political system, in which our leaders are about as popular as the proverbial used-car salesperson (according to recent polls).  Most of us feel that way about them but cannot do anything about it, so we go on with our lives and let the self-serving “leaders” in Washington decide our fate.

One defining characteristic of Americans is to rally in time of crisis.  We do that in wartime.  We do that with natural disasters like Katrina and Sandy.  We do that with regard to health matters.  We are generous with our charity.  Mainstream Americans are mostly good folks.  But we are reactive, not proactive.

So, let's see if we can rally to deal with this government crisis.  But we won't do it unless and until we know we have a real crisis on our hands.  So, let's have at it.  To get there, we need to go over the cliff and stay there long enough to actually begin to experience what it feels like, and what it means, to be off the precipice.

Let's see what happens when all the income tax credits expire on lower incomes and when 140 million Americans get hit with an average $1000 a year in a payroll tax hike.  Let's see what the experience is when sequestration kicks in hard.  Let's watch the layoffs of defense contractors who have to downsize since they won't be paid by the federal government.  Let's tax capital and dividends and income at high rates and let our citizens begin to feel the impact in their pocketbooks.  Let's tax estates at confiscatory rates.  Let's allow tax-free bonds to be penalized when our schools and sewer systems need financing.  Let's subject 24 million folks to the alternative minimum tax.  And on, and on, and on.

The political morons generalize in their pronouncements because they fear giving us real details.  Our president repeatedly attacks the rich with class-warfare rhetoric.  He says upper 2% of income but he doesn't say that many are independent businesses.  Does he ever mention an S-Corp small business that is trying to accumulate capital to grow a business and hire folks?  Many small businesses finds themselves burdened with a marginal effective tax rate above 50% under the present tax system – before we even go over the cliff?  That is where a small business can find itself when all taxes imposed are combined.

Obama avoided this detail today.  He cited CEOs of big companies.  He ignored the half of the country that is small and independent firms even while claiming that 97% of them will benefit.

Obama uses the new-age definition of millionaire: a couple filing a joint income tax return with a $250,000 annual income.  He never mentioned that his failure to compromise means the lower-income tax groups will incur a very high tax hike once we're off the cliff.  He never admits that some of the lower middle-class tax rates he claims are obtained are in place by using the deception of credits.

The Republicans are not any better.  Republicans never say, “We defend the 15% carried interest provision.”  They never explain the details by which many wealthy Americans benefit from provisions in the tax code that are engineered to benefit the few at the expense of the many.  They just say no changes in tax rates.  And now they are clamoring for “revenue,” which means changing the tax code, not the rates.

Readers, please note, it is the effective tax ratethat really counts.  Let me repeat and add clarity.  It is ONLY the effective tax rate that counts.

Both Republicans and Democrats are disingenuous.  That is a nice term for lying to us and deceiving us and using fuzzy language to mask the truth.

So, my personal proposal is to have a major fight and a resulting stalemate that persists until there is real pain in the land.  I would like to see my fellow citizens get really angry with Washington and set aside their partisan differences and then throw out some of the bums of both parties.

I would like to see us get mad enough and scared enough and clear enough about what's really happening to us, that we realize we have to pull together to claw our way back from the cliff and get this country on stable ground.

Let me invoke a scene from a movie that will date me.  What I want you to do is throw open the window, stick out your head, and yell “I'm mad as hell and I'm not going to take this anymore.”  If you are too young to remember the movie, Google the phrase and watch the scene (YouTube will take you there).

That is what I would like to see happen, dear readers.  We need to open our windows and yell.  Get 314 million of us angry enough at our government, and we will stop this nonsense.  Unless we get that angry, this broken-down system of ours is going to go clickety-clack right off the cliff.

Happy holidays to all cliff dwellers (us).  Get angry.  Tell your congress people that you're angry.  Whether you're Democrat or Republican, be angry, be clear-headed, and demand the truth. It's our country!

Thank you for asking.

David R. Kotok, Chairman and Chief Investment Officer

Are you mad enough yet? What would readers here like to see happen with the impending fiscal cliff?

I thank the regular reader who brought this missive by Kotok to my attention.

Larry Doyle

Please subscribe to all my work via e-mail, an RSS feed, on Twitteror Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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