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Friday, November 9, 2012

Warning: Fiscal Cliff Approaching

Thankfully, the election is over. The results have left some of our clients discouraged and others elated (I'll keep my own opinions to myself).  Unfortunately, the stock market has been less than happy with the outcome, as we have seen two straight days of significant losses.  This is mostly due to the fact that investors seem to now be focused on the fiscal cliff and it's potential damaging effects on the economic recovery.  

John Taylor, Stanford Economist, has this to say about the fiscal cliff:
"First, the fiscal cliff was not created by aliens from outerspace.  It is another poor government economic policy created in Washington. But the good news is that, like other bad economic policies in recent years, it can be fixed by a change in government policy."
"Second, it will take a bipartisan policy effort, but the policy ingredients are ready.  One of the best examples is the work of former Senator Sam Nunn and Pete Domenici who have created a bipartisan group of former members of Congress who have had a series of hearings with economists and other experts. The initiative is called the Strengthening of America--Our Children's Future and is supported by these organizations and think tanks:
  • The Concord Coalition
  • The Bipartisan Policy Center
  • The Center for Strategic and Interantional Studies
  • The American Business Conference
  • The James A. Baker III Institute for Public Policy at Rice University.
  • The Hoover Institution at Stanford
  • Harvard’s Belfer Center for Science and International Affairs
  • Woodrow Wilson International Center for Scholars

I think it is likely that Congress and the President will forge some sort of imperfect bipartisan solution that prevents the economy from going over the cliff.  It won't be ideal and may not be permanent, but then again, nothing from Washington ever is.  

As investors, now is not to time to base our decisions on knee-jerk reations to political outcomes. Instead, we need to remain calm and patient and let the political process work through this issue, warts and all.