Dan Clifton - Capital Investment Advisors

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Capital Investment Advisors
Governing & Campaigning
In a De-Leveraging Environment
a
September 2012
Daniel Clifton
Head of Policy Research
Strategas Research Partners
Key Policy Themes
• The US Is Undergoing A Once In 70-Year
Deleveraging Process
• Austerity Is Not A Winning Political Issue
• Fiscal Cliff Is A Symptom of the Larger
Issues
• The Bill Comes Due In ‘13 & Congress
Will Be Forced To Act On Tax/Spending
• Energy Becomes The New Jobs Policy
Election 2012 Themes
• Trajectory of the Economy Is Key
• Presidential Approval Rating Is Best
Indicator To Watch
• Approval Rating Has Been Tied To
Unemployment Rate
• Equity Market Is Pricing In An Obama
Victory But Headwinds Remain
• House Likely To Stay GOP
• Senate is 50/50 At This Point
Mapping Out The
Policy Landscape
1. 2012 Pre-Election
2. 2012 Election Outcome
3. 2012 Lame Duck Congress
4. 2013 Policy Implications
2012 Pre-Election
Countries Representing 50 Pct
World GDP Changing Presidencies
# of G20 Presidential Elections &
G20 GDP w/ Presidential Elections
8
40%
7
35%
6
5
# of G20
Presidential
Elections
(Left A x is)
GDP of G20 Elections
A s Pct of World GDP
(Right A x is)
30%
25%
4
20%
3
15%
2
10%
1
5%
0
0%
'04 '05 '06
'07 '08 '09 '10
'11
'12
'13
'14
Struggling Economy =
Unpopular Incumbents
G20 Presidential Re-Election
Trial Heats
70
65
United States
Gallup
9/6/2012
France
Election
Results
60
55
50
45
52
48
48
45
40
35
30
25
Obama Romney
Sarkozy Hollande
Large Budget Deficits & Debt
Limit New Fiscal Policy Stimulus
Countries with Sovereign Rating of AAA
2011 Surplus/Deficit & Debt as Pct. of GDP
100%
Net Debt, Pct. of GDP
80%
US
60%
UK
Fra
40%
Can
20%
Den
0%
Ger
Aut
Nld
Che
Aus
-20%
Swe
Lux
-40%
Fin
-60%
Deficit/Surplus, Pct. of GDP
-80%
-10%
-8%
-6%
-4%
-2%
0%
2%
The Challenge for Policymakers:
Below Trend Economic Growth…
Real GDP has been
below its long run
average in 17 of the past
19 quarters
With A Rising Debt to GDP Ratio
Keeping 2012 laws in
place will send Debt
to
GDP
to
unsustainable levels.
Austerity has to occur
while the economy is
growing below trend.
Federal Net Debt To GDP
120
If Current Polices
Are Ex tended
100
80
60
40
20
0
CBO Forecast 2012 -2021
'40
'48
'56
'64
'72
'80
'88
'96
'04
'12
'20
Placing In Context The
US Budget Challenge
Federal Debt Held by Public,
Pct of GDP, 1790-2037
(CBO)
200
150
WWII
100
Great
Depression
Civ il War
50
0
1790
If 201 2
Fiscal
Policy Is
Ex tended
1824
1858
WWI
1892
1926
1960
1994
2028
And Austerity Is Needed, Which Is
Not A Winning Political Strategy
House Seats Changing Hands Between
Parties By Election Year
1936
Seats Gained
by Dem ocrats
1938
1940
1942
Seats Gained
by Republicans
Av g Change In House
Seats 1938 - 1954,
39 Seats
1944
1946
1948
1950
1952
1954
1956
-100
-50
0
50
100
The Bill Comes
Due Post-Election
Net Federal Fiscal Stimulus, $BN
800
700
600
500
400
300
200
100
0
-100
-200
'01
'03
'05
'07
'09
'11
'13
'15
'17
'19
The fiscal cliff
approaching
is
about $537bn in
2013. The election
will
have
an
outsized impact on
how the issue is
resolved. But we
are skeptical the
entire drag can be
offset in 2013.
Forecast 2012-2021, Joint Committee On Taxation, Cong ressional Budget Office, Strategas
The Fiscal Cliff Could Serve As A
Catalyst For A Grand Fiscal Deal
•
•
•
•
•
•
•
Expiration of the Bush Tax Cuts
Expiration of the AMT Patch
Expiration of the Payroll Tax Cut/UI
Obama Healthcare Tax Increases Begin
2009 Stimulus Spending Rolling Over
Sequestered Spending Take Effect
Debt Ceiling Will Need To Be Raised
Components of the Fiscal Cliff
Fiscal Cliff Components, $BN, (CBO)
Affordable Care
Act Tax es, 1 8
Unemploy ment
Benefits, 26
Doc Fix , 1 1
201 0 Tax Cut
Ex tension &
Index AMT For
Inflation, 221
Sequestration,
65
Other Ex piring
Prov isions, 65
Pay roll Tax , 95
This does not reflect t he effect s of
Economic Feedback, -47
Other Changes
in Rev enue/
Spending, 1 05
2012 Election
Equity Market Is Pricing In
An Obama Victory
Dem Relative to GOP Stock Portfolio &
Intrade Odds Obama Is Reelected
110
66
Intrade Odds Of
President Obama
Being Reelected
108
106
58
102
56
100
54
98
94
92
Jan-12
62
60
104
96
64
52
Strategas Democratic Sweep
Stock Portfolio Relativ e To
GOP Sweep Stock Portfolio
Mar-12
May-12
50
48
Jul-12
46
Sep-12
Framework For Analyzing
The 2012 Election
Campaign
Narrative
Economic
Outlook
Swing
States
Which Is It?:
•Retrospective
Referendum
•Prospective
Choice
Trajectory:
•Jobs, Gas Prices
•Real Per Capita
Disposable
Income
State By State
•State Economy
•Demographics
Approval Ratings Dictate The
Percentage Vote For An Incumbent
President Approval Rating &
Pct of Presidential Vote
80%
70%
A pprov al
Rating
Pct of
V ote
Oc t ober of Reelec t ion
Y ea r , * Den ot es
Nov em ber ,
**Sept em ber , &
***T w o Pa r t y V ot e
60%
50%
40%
30%
20%
Johnson*Nixon* Carter** Reagan BushI Clinton***Bush II
Approval Ratings Are Key:
Obama In A Grey Area
Presidential Approval Rating
In September of Reelection Year
80
Won Re-Election
(Gallup)
70
Lost Re-Election or
Did Not Run
60
50
40
30
20
Obama
Clinton
Bush I
Reagan
Carter
Nixon
Johnson
Eisenhower
Truman
0
Bush II
10
Will The Convention Bounce Last?
52
President Obama's Approval Rating,
7-Day Rolling
Last Click:
(Gallup)
9/13, 49.8%
51
50
49
48
47
46
45
44
43
42
1/4/2012
3/6/2012
5/7/2012
7/8/2012
9/7/2012
Ultimately, The Economy Is Driving
The President’s Approval Rating
President Obama Approval
Rating & Unemployment
50
48
Sept A v g
= 49.1 %
Unemploy ment Rate,
Right, Inv erted
7.4
7.6
7.8
8.0
46
8.2
8.4
44
8.6
42
8.8
Obama A pprov al
Rating, Left
40
9.0
9.2
9.4
38
8/1/11
11/1/11
2/1/12
5/1/12
8/1/12
11/1/12
Obama Hoping For A Clinton
“Glide Path” Effect
1996 Election:
Registered Voters
(Gallup)
70
60
Clinton
Democratic Conv ention
A ug 26-29
50
40
30
Dole
Perot
Republican Conv ention
A ug 1 2 - 1 5
20
10
0
Jun 19
Jul 10
Jul 31
Aug 21
Sep 11
Oct 2
Oct 23
President Still Needs Employment
Growth Through The Election
65%
Pct Chg In Nonfarm Payrolls In
Re-Election Year & Two-Party Vote Pct
Pct of Tw o
Party V ote
Johnson
Nix on
60%
Clinton
55%
Bush II
Winning Cam paigns
50%
Bush I
45%
Losing Cam paigns
Obama
Pct Chg In Nonfarm Payrolls
(Jan-Sep Re-Election Y ear)
Carter
40%
-1%
Reagan
0%
1%
2%
3%
4%
Consumer Sentiment Has Been A
Good Predictor of Reelection
U Of Mich Consumer Sentiment &
Two Party Vote Pct
65%
60%
Pct of
Tw o
Party
V ote
Nix on*
Johnson*
Reagan
55%
Clinton
50%
Bush II
Obama
Bush I
*Signifies
Nov ember data
45%
Carter
40%
65
75
University of Michigan Consumer
Sentiment, Oct Of Re-Election Y ear
85
95
105
After-Tax, After-Inflation Income
Is A Good Predictor of Re-Election
Real Per Capita Income Growth & President's
Re-Election Share of the Popular Vote
65%
60%
Johnson
Pct of
Tw o
Party
V ote
Nix on
Reagan
55%
201 0
Midterm
35%
-2%
Winning Cam paigns
Losing Cam paigns
Bush I
Obama
45%
40%
Bush II
Clinton
50%
Carter
Real Per Capita Disposable
Income, 4 QTR Rolling, Y /Y
0%
2%
4%
6%
8%
Key To States Is Watching Which
Candidate Gets Over 50 Pct
Monthly Change In President Obama's
Advantage Over Romney In State Polling
Obama's Advantage
Over Romney By State
10
5
0
(RCP)
(RCP)
1
7 .7
3.5 3.3
0.6
July 9 - Septem ber 7
0.0
0
2.4 2.3
1.4
0.7 0.6 0.6 0.2
-1
-0.3
-0.7
-1.1
-2
-2.0
-2.2
-5
-3
-6.0
-10
-11.0
-15
PA NH NV MI CO WI OH FL VA IA NC MO AZ
-2.0
-2.1
-1.9
-1.8
-2.3
-3.0
-4
-4.2
-5
PA NH NV MI CO WI OH FL VA IA NC MO AZ
Undecided Voters Break To
The Challenger In Mid-October
70
2004 Presidential Election
Undecideds Break To The
1996 Presidential Election
Undecideds Break To The
Challenger
Challenger
(Gallup)
George W. Bush
Incum bent
John Kerry
Challenger
60
52.0
50
50.7
48.3
44.0
40
80
70
60
50
(Gallup)
Bill Clinton
Incum bent
54.0
49.2
30
20
20
Oct 16 Election
Poll
Result
Oct 16 Election
Poll
Result
48.9
41 .0
40
30
Bob Dole &
Ross Perot
Challengers
Oct 19 Election
Poll
Result
Oct 19 Election
Poll
Result
Consensus Pointing To A
GOP Sweep In Congress
100
Intrade Odds Of Republicans
Controlling The Senate & House
Republicans
Control the Senate
Republicans
Control the House
90
80
70
60
50
40
1/1/11
5/1/11
9/1/11
1/1/12
5/1/12
9/1/12
Democrats On Defense In The
Senate But Holding Strong
2012 Competitive Senate Races
Democratic Seats
14
Republican Seats
12
10
5
3
8
6
4
8
2
1
1
4
7
3
0
1
0
Solid
Likely
Lean
Toss Up
Likely Lost
No Wave Election But Democrats
Are Gaining Momentum
Generic Ballot, 4-Week Moving Average
(Rasmussen)
55%
50%
2 008
Election
Mass.
Special
Election
Midter m
Election
GOP
45%
40%
35%
Dem s
30%
25%
7/6/2008
7/6/2009
7/6/2010
7/6/2011
7/6/2012
Governing In Lame Duck & 2013
REMINDER: NEW CONGRESS
FACES A MASSIVE FISCAL CLIFF
Net Federal Fiscal Stimulus, $BN
800
700
600
500
400
300
200
100
0
-100
-200
'01
'03
'05
'07
'09
'11
'13
'15
'17
'19
The fiscal cliff
approaching
is
about $537bn in
2013. The election
will
have
an
outsized impact on
how the issue is
resolved. But we
are skeptical the
entire drag can be
offset in 2013.
Forecast 2012-2021, Joint Committee On Taxation, Cong ressional Budget Office, Strategas
Fiscal Drag Is Twice The Size Of The
Largest Post WWII Tax Increase
Size of Federal Tax Increases,
Pct of GDP
4.0%
T he com ing fiscal drag
dwarfs the size of any
prev ious tax increase
3.5%
3.5%
3.0%
2.5%
2.0%
1 .7 %
1.5%
1 .1 %
1.0%
0.5%
0.4%
0.4%
'69
'80
0.6%
0.2%
0.6%
0.4%
0.0%
'68
'82
'84
'86
'90
'93
'13
Two Catalysts For A Lame Duck Tax
Bill: Debt Ceiling & AMT
Taxpayers Affected By
AMT Under Various Scenarios
Federal Debt Outstanding
(Monthly, $TN)
17
70
16
Debt Limit
60
15
14
Last Click:
$15.5TN
13
12
11
50
20
9
8
Bush Tax Cuts Extended
Without AMT Patched
40
30
Total Public Debt
Subject to Limit
10
7
Jan05
(JCT, Millions)
Current Law
Bush Tax Cuts Extended
with AMT Patched
10
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
0
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Fiscal Cliff Implications
• Fiscal Cliff Is Not Binary: Most But Not All
of the Cliff Gets Resolved By The End of
the Year.
• Payroll Tax Cut Seems Unlikely To Get
Extended At This Time
• Tax Increase of 3.8% on Investment
Income Looks Difficult To Stop Regardless
of Who Gets Elected
Tax On Investment Income Is A
Backdoor Cap Gains & Dividend Tax
Capital Gains Realizations &
Capital Gains Tax Rates
'86 Tax
Increase
8%
45%
Cap Gains Tax
Rate (Right)
6%
35%
H ig h er Ra t e
= Low er
Rea liza t ion s
4%
25%
H ig h er Ra t e
= Low er
Rea liza t ion
2%
15%
Cap Gains Realizations,
Pct. of GDP (Left)
0%
5%
'54
'64
'74
'84
'94
'04
2013 Fiscal Deal?
Growing Number of Catalysts
For A Fiscal Deal In 2013
•
•
•
•
•
•
•
•
Elevated Debt & Deficit Levels
Rising Interest Costs
Rating Agency Warnings
Subpar Economic Growth
Expiring Tax Provisions
Spending Sequester
Social Security Unfunded Liabilities
One Party Controlling Congress?
One Party Controlling Congress
Gives Greater Fiscal Flexibility
Reconciliation Background
•
•
•
•
•
•
•
•
Legislative process established in
Congressional Budget Act of 1974
Allows Senate to pass reconciliation
bill with simple majority, rather than 60
votes
Eliminates a Senate filibuster
Debate limited to 20 hours
Requires House and Senate passed
budget resolution in place
Designed to speed passage of laws
impacting spending and taxes
Takes about six months to pass the
legislation into law.
In recent years, is used to pass fiscal
legislation lacking bi-partisan support
such as the Bush tax cuts and Obama
healthcare.
# of Votes for Passage
Recent Reconciliation Bills
90
85
85
80
78
75
70
65
58
60
54
55
56
50
50
45
40
'96 Welfare
Reform
'97 Cap
Gains
'01 Tax
Cuts
'03 Tax
Cuts
'05 Tax
Cuts
'10 Health
Care
Crowding Out Effect Coming
Net Interest Cost, Pct of Tax Revenues &
Avg. Annual 10-Year Treasury Yields
20
Interest costs are set
to ex plode despite
rates being kept low.
18
16
14
12
1 0 Y ear Treasury
Y ield, Right
14
16
10
12
8
10
6
Net Interest Costs A s
Pct of Tax Rev enues,
Left
8
6
4
4
2
Source: OMB, Strategas, Forecast 2012 -2021
'53
'59
'65
'71
'77
'83
'89
'95
'01
'07
'13
0
'19
Healthcare & Interest Costs: 43% of
Total Federal Spending By 2017
Healthcare Spending & Net Interest Costs
As Pct. Of Total Federal Spending
50%
Healthcare & Interest Will Be 43% of
Federal Spending in 201 7
Forecast: OMB, Strategas
40%
30%
Healthcare Spending As
Pct of Federal Spending
20%
10%
Net I nterest As Pct of
Federal Spending
0%
'62
'68
'74
'80
'86
'92
'98
'04
'10
'16
Meaningful Defense Cuts Coming
CBO's Projected Defense
Spending In 2011 & 2012 Budget
950
850
$1.2 T rillion
Reduction In
Projected Defense
Spending, -14.5%
CBO's 201 1 Budget
Projections
750
650
550
450
CBO's 201 2 Budget
Projections
350
250
'98 '00 '02 '04 '06 '08 '10 '12
'14
'16
'18 '20 '22
Tax Reform Is The Best Way To Deal
With The Fiscal Cliff But Challenging
Income Tax Shares,
Pct of Income Taxes Paid
Top Individual Tax Breaks for FY2014
With Expiring Provisions Extended
100
Excl. of Employ er Health Ins.
164.2
90
Excl. of Employ er Pensions
162.7
80
2009
70
60
Mortgage-Interest Deduction
99.8
Excl. of Medicare
1986
50
7 6.2
Capital Gains Rates
7 1.4
58.4
Earned Income Credit
40
30
20
10
0
Top 1%
Top 5% Top 10% Top 25% Top 50% Bot 50%
Deduction of Income Taxes
54
Tax Breaks for Estate Assets
51.9
Child Credit
51.7
Charitable Contributions
51.6
0
50
100
150
200
Individual & Corporate Tax
Reform Need To Move Together
Effective Corporate Tax Rate
By Industry, 2007-2008
Statutory Corporate Tax Rates
By Region
55
35%
50
30%
25%
United States
45
20%
40
15%
35
10%
5%
30
OECD (ex-US)
Whole & Retail
Trade
Construction
Finance
Avg. Eff. Tax
Rate
Manufacturing
Insurance
Info Tech
Real Estate
Agriculture
Transport
Leasing
Mining
Utilities
0%
25
20
'81
'84
'87
'90
'93
'96
'99 '02 '05
'08
'11
Buffett Rule Is About Raising
Capital Gains & Dividend Tax Rates
Buffett Rule Revenues &
President's Budget Projected Spending
($ TN, 10-Year Estimate)
50
46.96
45
40
35
30
25
20
15
10
5
0
0.05
Buffett Rule Revenue
Obama's Projected Spending
Consensus Scenario
• Obama wins presidency
• GOP controls both houses of Congress
• Lame duck bill extends some, but not all tax
cuts
• Contentious 2013 fiscal deal could get done
• Obama would need to sacrifice some HC
measures to get GOP to increase taxes
• No deal = rolling debt ceiling increases
• Obama uses his regulatory levers
Out of Consensus Scenario
•
•
•
•
Romney wins presidency
GOP controls both houses of Congress
All tax cuts get temporarily extended
Republicans complete a fiscal package of
tax and entitlement reform
• Green light on energy development
• Healthcare bill changed
• Small changes to Dodd-Frank
Need To Identify Sectors Not
Impacted By Austerity: Energy
Net Oil Imports:
Share of U.S. Consumption
(EIA)
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
'73
'78
'83
'88
'93
'98
'03
'08
Energy Production Is Creating Jobs
North Dakota:
Oil Production vs. Mining Employment
20
20
16
16
12
Oil Production
(Right scale, Millions of Barrels)
8
8
4
12
Mining and Logging Jobs
(Left scale , in Thousands)
0
4
0
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
What To Watch For In 2012
•
•
•
•
•
•
•
President Obama’s approval rating
Unemployment Rate
Congressional generic ballot test
Federal Reserve/ECB Policy
Fiscal cliff negotiations
Iran negotiations
Social unrest in the U.S.
The Big Questions For
2013 & Beyond
• Next Federal Reserve Chairman
• China Trade Policy
• Tax Reform: REITs, Home Mortgage
Deduction, Capital Gains, Dividends,
Carried Interest, Municipal Bonds, Estate
• Regulatory Policy
Questions?
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