The Wall Street crowd here in New York isn’t buying all the happy talk from Washington pols about how they’re ready to compromise to avoid the “fiscal cliff.”
What gives them pause? Take a really close look at Tuesday’s election results.
For the markets, President Obama’s victory and the outcome of the House and Senate races represent a worst-case scenario: a deeply divided government with both sides claiming that neither has a mandate.
With that, gridlock — and the fiscal-cliff scenario of economically crippling tax increases and budget cuts — is not just possible but likely.
At least that’s what the markets are saying, particularly on Wednesday with the 300-plus-point plunge in the Dow. Who knows — maybe cooler heads will prevail, allowing the president and congressional Republicans to reach a grand bargain that avoids the doomsday scenario set for the first of the year.
Republican House Speaker John Boehner has publicly stated that he’s willing to compromise, and privately, he’s telling people he wants a stop-gap deal that avoids the fiscal cliff while he and Obama work on a broader overhaul of the tax code — which even the president has suggested he supports.
But here’s why many investors I speak to and the markets in general are wary and preparing for the worst: Obama is regarded in the financial world as among the least economically sophisticated presidents in years, and he remains deeply committed to his broader agenda of making America look more like France.
In meetings with executives, it’s difficult to pin down exactly what economic policies he truly supports, apart from an expansive federal government and higher taxes to pay for it. And he remains in power after running one of the most divisive races in recent memory, particularly on economic matters.
There was nothing subtle about the president’s message of class warfare: He asked his followers to take “revenge” against his Republican opponent Mitt Romney, whom he attacked as a modern-day robber baron guilty not just of laying off people when he ran the private-equity firm, Bain Capital, but of actually killing them, as well.
His demonization of Romney worked, but at a steep price.
Obama won a clear electoral-college victory, but he is now president of a deeply divided nation, having won just 50 percent of the popular vote — not exactly the type of mandate most presidents would want if they plan to remake the country in the image of a European socialist state.
Yet people who know the president also know he’s ill-inclined to back down when it comes to his policy goals. They point to his “greatest” policy achievement, ObamaCare.
Despite massive unemployment following the 2008 financial crisis, Obama rammed the expensive health-care law through Congress without a shred of bipartisan support and seemingly without a second thought about the costs associated with heaping another mandate on struggling businesses.
And they know he sees many positives from Tuesday’s elections. Yes, the Republicans still solidly control the Congress, but they lost two seats in the Senate, increasing the Democratic majority there.
Vice President Joe Biden, while regarded as a loose cannon, often speaks the mind of the president, and he called the outcome of the Senate races a mandate to go full throttle on the president’s agenda of taxing businesses, bigger government, etc. — even if his boss has so far remained silent.
But the markets aren’t silent. Well before Tuesday’s election results, sophisticated investors fretted about the scenario of a narrow Obama victory coupled with the Dems adding seats in the Senate and Republicans maintaining control of the House.
They saw that as a trigger for the fiscal cliff — a configuration least likely to produce compromise, even on the Republican side, with Tea Partiers demanding that leadership hold the line on taxes and spending.
As a result, they were recommending to clients that they snap up Treasury bonds and shares of alcohol companies and even gun manufacturers. It isn’t a coincidence that shares of gun manufacturer Smith & Wesson rose sharply after Obama’s win, as did Treasury bonds, even though they offer paltry returns, given current interest rates.
Again, cooler heads might prevail. Obama might be magnanimous in victory, offering an olive branch to Boehner and Senate Republican leader Mitch McConnell, who might ignore Tea Party activists and meet the president half-way on “new revenues,” i.e., higher taxes.
But markets have a funny way of sniffing out the truth, and over the last couple of days, they hate the stench coming out of Washington.