Congress will kick tax can down the road: Valliere

The presidential election is very much up in the air, the economy is slowly recovering and the year-end tax debate in Congress can only be described as a looming train wreck – or at least that’s the take of Gregory Valliere, chief strategist at the nonpartisan Potomac Research Group.

As keynote luncheon speaker Tuesday in Washington, D.C., at the Investment Management Consultants Association annual conference, Mr. Valliere gave the crowd a little of everything.
He described the economy as being in a “self-sustaining recovery, but nothing to write home about.”

He went on to predict that the nation’s unemployment rate could fall to as low as 7.7% by the November elections.

In what he described as a “Goldilocks economy,” Mr. Valliere said the Federal Reserve’s policy of keeping interest rates low might not pose a near-term inflation threat, “but down the road, a bit we might have to worry.”

“This Fed is the most liberal, most accommodating, most dovish Fed I’ve ever seen,” he said. “I’m convinced they would like to keep interest rates at zero for the rest of my life.”

But on that same note, Mr. Valliere acknowledged there is currently no reason for the Fed to alter its stated policy of keeping interest rates low until late 2014. “I think the Fed will end Operation Twist in June,” he said. “But [the third round of quantitative easing] is still on the table because of what might happen in Europe and because of the nightmare that could occur in fiscal policy.”

Mr. Valliere was most candid when discussing lawmakers. On Congress’ recent 9% approval rating, he joked that he wondered what kind of people make up that 9%. “How could anyone have a positive approval rating for a group that dysfunctional?” he asked.

Along those lines, he predicted that the American public might not have any clear indication of what will happen to the Bush tax cuts, slated to expire Dec. 31, until Dec. 22. “If the Bush tax cuts are not extended the impact would be 3 to 4 percentage points off of [gross domestic product],” he said, predicting that Congress will take the “path of least resistance by kicking the can down the road.”

But waiting until after the elections to deal with a host of tax and fiscal issues, including the extension of the debt ceiling and the alternative minimum tax, leads to more uncertainty for the markets, he said. “We know that the markets hate uncertainty, and this will be the mother of uncertainty for investors as we head into the fourth quarter,” he said. “And I don’t see the election as being a catalyst for solving all these issues.”

On the topic of the election, Mr. Valliere is expecting a “very negative campaign” because “negative campaigns work.”

“Ultimately, it will come down to who scares Columbus, Ohio, the most,” he said.
Mr. Valliere said President Barack Obama holds a clear advantage with female and Hispanic voters, but he might at risk of losing the Jewish vote. “Florida and New Jersey are both states that will be very close,” he said.

Despite describing himself several times as “not an Obama basher,” Mr. Valliere reserved some of his most critical comments for the president.
On Mr. Obama’s recent comments challenging the Supreme Court not to take an activist role in ruling on the health care overall, Mr. Valliere said: “beating up on the Supreme Court while they’re still considering a case is pretty tacky.”

“We know from surveys that most Americans like Obama. The problem is, he’s done some boneheaded things like making health care reform a priority instead of jobs, and his comments to the Supreme Court,” he added.

On the subject of the president’s leadership and the administration in general, Mr. Valliere said: “To my knowledge, there is no one at a high level in this administration who has ever run a business. I see a fundamental misunderstanding — or ignorance — in this administration, of business.”