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Governing & Campaigning In A
De-Leveraging Environment
May 2012
Daniel Clifton
[email protected]
219 Days Until Election Day
•
•
•
•
Here Is What Was Happening 219 Days Ago
8/26: Hurricane Irene Was Expected To Hit The
East Coast But Didn’t
8/25: Berkshire Hathaway Invests $5BN In Bank
of America
8/24: Steve Jobs Resigns As CEO of Apple
8/23: 5.9 Magnitude Earthquake In VA That Is
Felt Up To Boston.
Punch Line: A Lot Can Happen
Between Now & The 2012 Election
Mapping Out The Next 200 Days
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
4/30/201 2
France
IFOP-Fiducial
4/1 0/201 2
60
53
55
50
46
47
47
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%
Ger
Aut
Nld
Den
0%
Che
Aus
-20%
Swe
Lux
-40%
Fin
-60%
Deficit/Surplus, Pct. of GDP
-80%
-10%
-8%
-6%
-4%
-2%
0%
2%
…And Austerity Is Needed, Which Is
Not A Winning Political Strategy
House Seats Changing Hands Between
Parties By Election Year
Net Debt To GDP
120
Pre-Debt
Ceiling
100
1936
Seats Gained
by Dem ocrats
1938
1940
80
Current
Policy
60
Current
Law
40
1942
Seats Gained
by Republicans
Avg Change In House
Seats 1938 - 1954,
39 Seats
1944
1946
1948
1950
1952
20
CBO Forecast 2012 -2021
0
'40 '48 '56 '64 '72 '80 '88 '96 '04 '12 '20
2012 -2021 Forecast , Congressional Budget Office
1954
1956
-100
-50
0
50
100
Austerity or Stimulus?
3%
Real GDP (% Change Since 2007)
108
2%
106
1%
104
0%
102
-1%
100
-2%
98
-3%
96
-4%
-5%
-6%
-7%
Post WWII Employment Cycles
Peak to 27 Months Post Cycle Trough
We are here
94
France
Germany
Japan
United States
92
Sep '48
Apr '60
Jul '81
Dec '07
90
2008
Apr '57 *
Jul '7 4
Feb '01
88
1
2007
Jul '53
Mar '7 0
Jun '90
2009
2010
2011
9
17
25
33
* 22 months after Apr '57 cycle troughs, there is another recession
# Months From Peak
41
49
57
Traditional Political/Equity Cycle
Did Not Materialize In 2011
S&P 500 Total Returns by Presidential Cycle
(Since 1926)
30%
26.5%
25%
Historical
20%
1 8.7 %
1 5.1 %
15%
Obama
1 1 .0%
10%
9.0%
8.2%
5%
2.1 %
0%
1
2
3
4
Equity Markets Wait To See
Who The Election Winner Is
S&P 500 Price Return, YTD Pct Change
'96 & '04 Presidential Re-Election Years
125
120
Election Day
115
1996
110
105
100
95
2004
90
J
F
M
A
M
J
J
A
S
O
N
D
Monetary Policy Is Now Shouldering
The Stimulus Burden…
S&P 500 Index
1500
1400
QE Av g Monthly
Return= 2.7 %
1300
NonQE Av g Monthly
Return = -2.8%
1200
1100
1000
900
800
700
600
1/2/2009
Bernanke's Jackson Hole
Speech: QE2
Operation
T wist
QE1 Expanded
1/2/2010
1/2/2011
1/2/2012
…But 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, Congressional 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
2012 Election
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 Are Key:
Obama In A Grey Area
Presidential Approval Rating in
March of Re-Election Year
80
Either Lost Re-Election
or Didn't Run
70
Won Re-Election
60
50
40
30
20
10
Obama
Bush II
Clinton
Bush I
Reagan
Carter
Nixon
Johnson
Eisenhower
Truman
0
President Is Slowly Inching Closer
To 50 Pct Approval Rating
President Obama's Approval Rating
(Gallup)
70
65
60
55
50
45
40
35
30
'09
'10
'11
'12
Growing Economy = Growing
Probability For Obama Win
S&P 500 & Intrade Odds That
President Obama Is Reelected
1,550
70
Bin Laden
Death
1,450
65
S&P 500
(Left)
1,350
60
1,250
55
1,150
50
1,050
950
1/3/11
Intrade Odds That Obama
Is Reelected (Right)
45
40
4/3/11
7/3/11
10/3/11
1/3/12
4/3/12
Employment Headed In The Right
Direction For Obama Victory
No President Has
Been Re-Elected
With
An
Increasing
Unemployment
Rate. Conversely,
Every
President
With A Decreasing
Unemployment
Rate Won ReElection
Presidential Re-Election &
Change In The Unemployment Rate
Nixon
Margin of
25% Reelection
20%
Victory
Reagan
Eisenhower
15%
Clinton
10%
Bush II
5%
0%
-5%
Bush I
Carter
-10%
Change In Election Y ear
Unemployment Rate
-15%
-3
-2
-1
0
1
2
Employment Growth Helps
But Is Not The Entire Story
President Obama Approval
Rating & Unemployment
70
65
Obama Approv al
Rating, Left
60
7.5
PreMidterm
Election
8.0
PostMidterm
Election
8.5
9.0
55
9.5
50
10.0
45
40
10.5
Unemploy ment Rate,
Right, Inv erted
11.0
35
11.5
30
1/1/2009
12.0
11/1/2009
9/1/2010
7/1/2011
5/1/2012
As Gasoline Prices Are More
Correlated Than Employment
President Obama Approval Rating
& Retail Gasoline Price
70
1.40
Regular Grade
Gasoline,
(Right, Inv erted)
65
60
1.90
2.40
Bin Laden
Killed
55
50
2.90
45
Last
Click:
$3.94
40
Obama Approv al
Rating (Left)
35
30
'09
'10
'11
'12
3.40
3.90
Elevated Oil Prices Could Lead
To Broader Economic Concerns
U of Michigan Consumer Sentiment
& Retail Gasoline Price
U of M Consumer
Sentiment (Left)
100
Regular Grade
Gasoline,
(Right, Inverted)
2.00
90
2.50
80
3.00
70
60
50
1.50
Consumer confidence
declined in near
unison with rising
gasoline prices from
'04-'08
'04
'05
'06
'07
3.50
4.00
'08
'09
'10
'11
'12
Consumer Sentiment Has Been A
Good Predictor of Reelection
U of Michigan Consumer Sentiment,
Final Three Years of First Terms
110
Year 2
Year 3
Year 4
Reagan
Bush II
100
Clinton
90
Bush I
80
70
60
Obama
50
Carter
40
1
3
5
7
9 11 13 15 17 19 21 23 25 27 29 31 33 35
After-Tax, After-Inflation Income Is
The Best Predictor of Re-Election
Real Per Capita Income Growth & President's
Re-Election Share of the Popular Vote
65%
60%
Johnson
Pct of
Two
Party
V ote
Nix on
Reagan
55%
45%
40%
35%
-2%
Bush II
Clinton
50%
Obama
201 0
Midterm
Winning Cam paigns
Losing Cam paigns
Bush I
Carter
Real Per Capita Disposable
Income, 4 QTR Rolling, Y /Y
0%
2%
4%
6%
8%
This Number Has To Go Higher
For The President To Win
Real Per Capita Disposable Income,
Y/Y Pct Chg
8
6
4
2
0
-2
Last Click:
March
-0.12%
-4
-6
'06
'07
'08
'09
'10
'11
'12
Geopolitical Events Will Loom Large
Over The Political Landscape In ‘12
Intrade Odds Of Strike On Iran &
Price Of Brent Crude Oil
140
Intrade Odds Of Strike
On Iran Before
1 2/31 /201 2, Right
60
50
130
40
120
30
110
20
100
10
Brent Crude Oil,
Left
90
9/20/2011
0
11/20/2011
1/20/2012
3/20/2012
Consensus Pointing To A
GOP Sweep In Congress
Intrade Odds Of Republicans
Controlling The Senate & House
90
85
Republicans Control
the Senate
Republicans Control
the House
80
75
70
65
60
55
50
45
40
1/1/11
5/1/11
9/1/11
1/1/12
5/1/12
Congressional Approval Rating
Points To Anti-Incumbent Election
Congressional Approval Rating &
Incumbent Re-Election Rate
Congressional
A pprov al
(Right)
Incumbent ReElection Rate
(Left)
100
98
60
50
96
94
40
92
90
30
88
20
86
84
10
82
80
0
'74
'78
'82
'86
'90
'94
'98
'02
'06
'10
But Generic Ballot Is Not
Showing A “Wave” Against GOP
Republican Lead Over Democrats in
Rasmussen Generic Ballot
10%
8%
8%
6%
5%
5%
Oct. '11
Mar. '12
4%
4%
2%
0%
-2%
-4%
-6%
-8%
-7 %
Oct. '08
Oct. '09
Oct. '10
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, Congressional Budget Office, Strategas
The Challenge: Below Trend
Economic Growth…
Quarterly Real GDP,
Pct Change, SAAR
10
A v g 1 992 - 2007
3.2%
8
6
4
2
0
-2
-4
-6
-8
-10
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
…With A Rising
Debt to GDP Ratio…
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
…& Net Interest Costs Set To
Explode Despite Low Interest Rates
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
8
4
Net Interest Costs A s
Pct of Tax Rev enues,
Left
6
2
4
0
'53
'59
'65
'71
'77
'83
'89
'95
'01
'07
'13
'19
$537BN Fiscal Drag Is Broad Based
Components of the 2013 Fiscal Drag, $BN
Affordable Care
Act Tax es, -26.0
Non-Defense Disc
Sequester, -31.0
Defense
Sequester
-55.0
Payroll Tax, UI
-92.7
Healthcare
Sequester, -12.0
Other, -14.8
2010 Tax Cut
Extension, -303.3
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)
(JCT, Millions)
17
70
16
Debt Limit
60
15
14
Last Click:
$15.5TN
13
12
11
20
9
8
7
Jan05
40
30
Total Public Debt
Subject to Limit
10
50
Bush Tax Cuts Extended
Without AMT Patched
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
Three Lame Duck Scenarios
• Consensus Election Result: Obama Pushes
Bowles Simpson, Republicans Object. GOP
accepts short-term tax cut extension for
debt ceiling increase.
• Status Quo Election Result: Who has the
mandate? Fight over high income tax cuts?
Temporary debt ceiling extension?
• Republican Sweep: How does Obama
handle this? Do Republicans wait?
2013 Fiscal Deal?
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
Supreme Court Ruling On
Healthcare Could Be A Catalyst
Intrade: SCOTUS Finds Individual
Mandate Unconstitutional
70
Affordable Care Act Tax Provisions
In Place in CY 2013
(JCT, $BN)
25
20.5
20
60
15
50
10
40
5.5
0.4
0.1
3/1/12
Devices
1/1/12
Pharma
20
11/1/11
FSA
0
Cellulosic
0.4
Medicare
Tax
1.8
HC
Deduction
1.5
30
7.5% AGI
2.9
Part D
Subsidy
5
Projected Healthcare Spending
Looks Unsustainable
Healthcare Spending & Net Interest Costs
As Pct. Of Total Federal Spending
2010 Healthcare Legislation
Spending Estimate, $BN
50%
250
200
March 2012: $1.7 tn
Estimate Based On 9
Y ears Of Implementation
40%
30%
150
100
50
Healthcare & Interest Will Be 43% of
Federal Spending in 2017
March 2010: Original
$900bn, 10-Y ear Estimate
Was Based On Six Y ears of
Implementation
0
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Healthcare Spending As
Pct of Federal Spending
20%
10%
Net Interest As Pct of
Federal Spending
0%
'62
'68
'74
2012 -2021 Forecast , Congressional Budget Office, Office of Management and Budget
'80
'86
'92
'98
'04
'10
'16
Tax Reform Is The Best Way To Deal
With The Fiscal Cliff But Challenging
Federal Tax Revenues,
Pct of GDP
22
Top Individual Tax Breaks for FY2014
With Expiring Provisions Extended
Sustained Tax Rev enue Ov er 20 pct of
GDP Seems Unlikely Giv en History
21
20
Excl. of Employ er Health Ins.
164.2
Excl. of Employ er Pensions
162.7
Mortgage-Interest Deduction
19
99.8
Excl. of Medicare
18
7 6.2
Capital Gains Rates
17
7 1.4
58.4
Earned Income Credit
16
15
14
13
12
'46
'54
'62
'70
'78
'86
'94
'02
'10
2012 -2021 Forecast , Congressional Budget Office
'18
Deduction of Income Taxes
54
Tax Breaks for Estate Assets
51.9
Child Credit
51.7
Charitable Contributions
51.6
0
50
100
150
200
Buffett Rule Is About Raising
Capital Gains & Dividend Taxes
Buffett Rule Revenues &
President's Budget Projected Spending
($ 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
Dividend Tax Rates Set To Triple
Without Congressional Action
Annual Change In The Number of S&P 500
Companies Paying A Dividend
30
Cap Gains &
Dividends
@ 15%
1986 Tax Reform Act equalized capital gains
until the late 1990 income tax increase
20
Div idend Tax
Increase
10
Cap Gains
Cut
0
-10
-20
-30
-40
Cap gains tax rate was half of
div idends, leading to a shedding of
div idend pay ments in the late 90's.
'81
'84
'87
'90
'93
Financial
Crisis
'96
'99
'02
'05
'08
'11
Companies Are Pushing For
Corporate Tax Reform
Effective Corporate Tax Rate
By Industry, 2007-2008
Spread Between Statutory Corporate
Tax Rate And Effective Average Tax Rate
35%
United States
30%
Japan
25%
Germany
20%
United Kingdom
15%
France
Italy
10%
Mexico
5%
Korea
0%
Whole & Retail
Trade
Construction
Finance
Avg. Eff. Tax
Rate
Manufacturing
Insurance
Info Tech
Real Estate
Agriculture
Transport
Leasing
Mining
Utilities
Spain
Canada
Turkey
0%
2%
4%
6%
8%
10%
12%
Cannot Do Corporate Tax Reform
Without Individual Tax Reform
Net Income By Business Entity
(IRS, Statistics Of Income, Billions Of 2009 Dollars)
2,000
1,800
Sole Props, S-Corp,
Partnerships
1,600
1,400
1,200
1,000
800
600
C-Corp
400
200
'80
'84
'88
'92
'96
'00
'04
'08
The Fed Is Hurting
Social Security
Social Security Fund's Actuarial
Nominal Interest Rate Assumptions
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
Top 10 Federal Spending Programs
Exceed Tax Revenues
Top 10 Federal Spending Programs &
Tax Revenues, $BN, FY 2011
3500
$3,099
3000
2500
Transport
Nutrition
Unemploy
Tax
Rev enues
Fed Employ ees
V eterans
Interest
$2,305
Healthcare
2000
Medicare
1500
1000
Defense
Social Securit y
500
0
1
2
Despite Catalysts, High Turnover
Could Make Reform Difficult
Number of Freshmen in
Congress By Election Year
140
120
100
80
60
40
20
0
'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
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
What To Watch For
•
•
•
•
•
•
•
•
President Obama’s approval rating
Real per capita disposable income
Congressional generic ballot test
Supreme Court ruling on healthcare
Fed policy: Operation Twist continues?
Fiscal cliff negotiations
Iran negotiations
Social unrest in the U.S.