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Capital Investment AdvisorsGoverning & Campaigning
In a De-Leveraging Environmenta
September 2012
Daniel CliftonHead 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
1. 2012 Pre-Election
2. 2012 Election Outcome
Mapping Out The Policy Landscape
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
0
1
2
3
4
5
6
7
8
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140%
5%
10%
15%
20%
25%
30%
35%
40%
GDP of G20 Elections As Pct of World GDP
(Right Axis)
# of G20 Presidential
Elections (Left Axis)
Struggling Economy = Unpopular Incumbents
G20 Presidential Re-Election Trial Heats
48 4845
52
25
30
35
40
45
50
55
60
65
70
Obama Romney Sarkozy Hollande
France Election Results
United StatesGallup
9/6/2012
Large Budget Deficits & Debt Limit New Fiscal Policy Stimulus
Countries with Sovereign Rating of AAA2011 Surplus/Deficit & Debt as Pct. of GDP
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-10% -8% -6% -4% -2% 0% 2%
US
UK Fra
CanAut
AusDen
Ger
Che
SweLux
Fin
Nld
Deficit/Surplus, Pct. of GDP
Net Debt, Pct. of GDP
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 RatioFederal Net Debt To GDP
0
20
40
60
80
100
120
'40 '48 '56 '64 '72 '80 '88 '96 '04 '12 '20
If Current Polices Are Extended
CBO Forecast 2012 -2021
Keeping 2012 laws inplace will send Debtto GDP tounsustainable levels.Austerity has to occurwhile the economy isgrowing below trend.
Placing In Context The US Budget Challenge
Federal Debt Held by Public,Pct of GDP, 1790-2037
(CBO)
0
50
100
150
200
1790 1824 1858 1892 1926 1960 1994 2028
Civ il War
Great Depression
WWI
WWII
If 2012 Fiscal
Policy Is Extended
And Austerity Is Needed, Which Is Not A Winning Political Strategy
House Seats Changing Hands Between Parties By Election Year
-100 -50 0 50 100
1956
1954
1952
1950
1948
19461944
1942
1940
1938
1936
Seats Gained by Republicans
Seats Gained by Dem ocrats
Avg Change In House Seats 1938 - 1954,
39 Seats
The Bill Comes Due Post-Election
Net Federal Fiscal Stimulus, $BN
-200
-100
0
100
200
300
400
500
600
700
800
'01 '03 '05 '07 '09 '11 '13 '15 '17 '19
The fiscal cliffapproaching isabout $537bn in2013. The electionwill have anoutsized impact onhow the issue isresolved. But weare skeptical theentire drag can beoffset 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
Components of the Fiscal CliffFiscal Cliff Components, $BN, (CBO)
2010 Tax Cut Extension &
Index AMT For Inflation, 221
Other Changes in Revenue/
Spending, 105
Pay roll Tax, 95
Other Expiring Provisions, 65
Sequestration, 65
Unemploy ment Benefits, 26
Affordable Care Act Taxes, 18
Doc Fix , 11
This does not reflect the effects of Economic Feedback, -47
2012 Election
Equity Market Is Pricing In An Obama Victory
Dem Relative to GOP Stock Portfolio & Intrade Odds Obama Is Reelected
92
94
96
98
100
102
104
106
108
110
Jan-12 Mar-12 May-12 Jul-12 Sep-1246
48
50
52
54
56
58
60
62
64
66
Intrade Odds Of President Obama Being Reelected
Strategas Democratic Sweep Stock Portfolio Relative To GOP Sweep Stock Portfolio
Framework For Analyzing The 2012 Election
Campaign Narrative
Which Is It?:•Retrospective Referendum•Prospective
Choice
Economic Outlook
Trajectory:•Jobs, Gas Prices•Real Per Capita
Disposable Income
Swing States
State By State•State Economy•Demographics
Approval Ratings Dictate The Percentage Vote For An Incumbent
President Approval Rating & Pct of Presidential Vote
20%
30%
40%
50%
60%
70%
80%
Johnson*Nixon* Carter** Reagan BushI Clinton***Bush II
Pct of Vote
Approval Rating
October of Reelect ion Yea r , * Den otes
Nov em ber , **Septem ber , &
***Tw o Pa r ty V ote
Approval Ratings Are Key: Obama In A Grey Area
Presidential Approval Rating In September of Reelection Year
(Gallup)
0
10
20
30
40
50
60
70
80Tr
uman
Eis
enho
wer
John
son
Nix
on
Car
ter
Rea
gan
Bus
h I
Clin
ton
Bus
h II
Oba
ma
Won Re-Election
Lost Re-Election or Did Not Run
Will The Convention Bounce Last?President Obama's Approval Rating,
7-Day Rolling (Gallup)
42
43
44
45
46
47
48
49
50
51
52
1/4/2012 3/6/2012 5/7/2012 7/8/2012 9/7/2012
Last Click: 9/13, 49.8%
Ultimately, The Economy Is Driving The President’s Approval Rating
President Obama Approval Rating & Unemployment
38
40
42
44
46
48
50
8/1/11 11/1/11 2/1/12 5/1/12 8/1/12 11/1/12
7.4
7.6
7.8
8.0
8.2
8.4
8.6
8.8
9.0
9.2
9.4
Obama Approval Rating, Left
Unemploy ment Rate, Right, Inverted
Sept Avg = 49.1%
Obama Hoping For A Clinton “Glide Path” Effect
1996 Election:Registered Voters
(Gallup)
0
10
20
30
40
50
60
70
Jun 19 Jul 10 Jul 31 Aug 21 Sep 11 Oct 2 Oct 23
Clinton
Dole
PerotRepublican Convention
Aug 12 - 15
Democratic ConventionAug 26-29
President Still Needs Employment Growth Through The Election
Pct Chg In Nonfarm Payrolls In Re-Election Year & Two-Party Vote Pct
40%
45%
50%
55%
60%
65%
-1% 0% 1% 2% 3% 4%
Carter
ObamaBush I
Bush II
ClintonReagan
Johnson NixonPct of Two Party Vote
Pct Chg In Nonfarm Payrolls (Jan-Sep Re-Election Y ear)
Winning Cam paigns
Losing Cam paigns
Consumer Sentiment Has Been A Good Predictor of Reelection
U Of Mich Consumer Sentiment & Two Party Vote Pct
40%
45%
50%
55%
60%
65%
65 75 85 95 105
Pct of Two
Party Vote
University of Michigan Consumer Sentiment, Oct Of Re-Election Y ear
Nixon*
Reagan
Johnson*
Clinton
Bush II
Carter
Obama
Bush I *Signifies November data
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
35%
40%
45%
50%
55%
60%
65%
-2% 0% 2% 4% 6% 8%
Reagan
Johnson
Nixon
Bush IIClinton
Bush IObama
Carter2010 Midterm
Winning Cam paigns
Losing Cam paigns
Real Per Capita Disposable Income, 4 QTR Rolling, Y /Y
Pct of Two
Party Vote
Key To States Is Watching Which Candidate Gets Over 50 Pct
Obama's AdvantageOver Romney By State
(RCP)
7 .7
3.5 3.32.4 2.3
1.4 0.7 0.6 0.6 0.2
-2.0
-6.0
-11 .0
-15
-10
-5
0
5
10
PA NH NV MI CO WI OH FL VA IA NC MO AZ
Monthly Change In President Obama's Advantage Over Romney In State Polling
(RCP)
-0.3
-2.2-2.0
0.6
-0.7
-2.1-1 .9
-1 .1
-1 .8
-2.3
0.0
-3.0
-4.2
-5
-4
-3
-2
-1
0
1
PA NH NV MI CO WI OH FL VA IA NC MO AZ
July 9 - Septem ber 7
Undecided Voters Break To The Challenger In Mid-October
2004 Presidential ElectionUndecideds Break To The
Challenger(Gallup)
52.0 50.7
44.048.3
20
30
40
50
60
70
Oct 16Poll
ElectionResult
Oct 16Poll
ElectionResult
George W. BushIncum bent
John KerryChallenger
1996 Presidential ElectionUndecideds Break To The
Challenger(Gallup)
54.049.2
41.0
48.9
20
30
40
50
60
70
80
Oct 19Poll
ElectionResult
Oct 19Poll
ElectionResult
Bill ClintonIncum bent
Bob Dole & Ross Perot
Challengers
Consensus Pointing To A GOP Sweep In Congress
Intrade Odds Of Republicans Controlling The Senate & House
40
50
60
70
80
90
100
1/1/11 5/1/11 9/1/11 1/1/12 5/1/12 9/1/12
Republicans Control the Senate
Republicans Control the House
Democrats On Defense In The Senate But Holding Strong
2012 Competitive Senate Races
8
43
7
1
5
1
1
3
0
0
2
4
6
8
10
12
14
Solid Likely Lean Toss Up Likely Lost
Democratic Seats Republican Seats
No Wave Election But Democrats Are Gaining MomentumGeneric Ballot, 4-Week Moving Average
(Rasmussen)
25%
30%
35%
40%
45%
50%
55%
7/6/2008 7/6/2009 7/6/2010 7/6/2011 7/6/2012
Midterm ElectionMass.
Special Election
2008 Election
GOP
Dems
Governing In Lame Duck & 2013
REMINDER: NEW CONGRESS FACES A MASSIVE FISCAL CLIFF
Net Federal Fiscal Stimulus, $BN
-200
-100
0
100
200
300
400
500
600
700
800
'01 '03 '05 '07 '09 '11 '13 '15 '17 '19
The fiscal cliffapproaching isabout $537bn in2013. The electionwill have anoutsized impact onhow the issue isresolved. But weare skeptical theentire drag can beoffset in 2013.
Forecast 2012-2021, Joint Committee On Taxation, Congressional Budget Office, Strategas
Fiscal Drag Is Twice The Size Of The Largest Post WWII Tax Increase
Size of Federal Tax Increases, Pct of GDP
1 .7 %
0.4% 0.4%
1.1%
0.2%
0.6%0.4%
0.6%
3.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
'68 '69 '80 '82 '84 '86 '90 '93 '13
T he com ing fiscal drag dwarfs the size of any previous tax increase
Two Catalysts For A Lame Duck Tax Bill: Debt Ceiling & AMT
Federal Debt Outstanding (Monthly, $TN)
7
8
9
10
11
12
13
14
15
16
17
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Total Public Debt Subject to Limit
Debt Limit
Last Click: $15.5TN
Taxpayers Affected By AMT Under Various Scenarios
(JCT, Millions)
0
10
20
30
40
50
60
70
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Bush Tax Cuts Extended with AMT Patched
Bush Tax Cuts Extended Without AMT Patched
Current Law
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
0%
2%
4%
6%
8%
'54 '64 '74 '84 '94 '045%
15%
25%
35%
45%
Hig h er Ra te = Low er
Rea liza t ion s Hig h er Ra te = Low er
Rea liza t ion
'86 Tax Increase
Cap Gains Realizations, Pct. of GDP (Left)
Cap Gains Tax Rate (Right)
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 PassageRecent Reconciliation Bills
7 8
85
58
50
5456
40
45
50
55
60
65
70
75
80
85
90
'96 WelfareReform
'97 CapGains
'01 TaxCuts
'03 TaxCuts
'05 TaxCuts
'10 HealthCare
Crowding Out Effect ComingNet Interest Cost, Pct of Tax Revenues &
Avg. Annual 10-Year Treasury Yields
4
6
8
10
12
14
16
18
20
'53 '59 '65 '71 '77 '83 '89 '95 '01 '07 '13 '190
2
4
6
8
10
12
14
16
10 Y ear Treasury Y ield, Right
Net Interest Costs As Pct of Tax Revenues,
Left
Interest costs are set to explode despite
rates being kept low.
Source: OMB, Strategas, Forecast 2012 -2021
Healthcare & Interest Costs: 43% of Total Federal Spending By 2017
Healthcare Spending & Net Interest Costs As Pct. Of Total Federal Spending
0%
10%
20%
30%
40%
50%
'62 '68 '74 '80 '86 '92 '98 '04 '10 '16
Net Interest As Pct of Federal Spending
Healthcare Spending As Pct of Federal Spending
Healthcare & Interest Will Be 43% of Federal Spending in 2017
Forecast: OMB, Strategas
Meaningful Defense Cuts ComingCBO's Projected Defense
Spending In 2011 & 2012 Budget
250
350
450
550
650
750
850
950
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
CBO's 2011 Budget Projections
CBO's 2012 Budget Projections
$1.2 T rillion Reduction In
Projected Defense Spending, -14.5%
Tax Reform Is The Best Way To Deal With The Fiscal Cliff But Challenging
Top Individual Tax Breaks for FY2014 With Expiring Provisions Extended
51.6
51.7
51.9
54
58.4
7 1.4
7 6.2
99.8
162.7
164.2
0 50 100 150 200
Charitable Contributions
Child Credit
Tax Breaks for Estate Assets
Deduction of Income Taxes
Earned Income Credit
Capital Gains Rates
Excl. of Medicare
Mortgage-Interest Deduction
Excl. of Employ er Pensions
Excl. of Employ er Health Ins.
Income Tax Shares, Pct of Income Taxes Paid
0
1020
30
4050
60
70
8090
100
Top 1% Top 5% Top 10% Top 25% Top 50% Bot 50%
2009
1986
Individual & Corporate Tax Reform Need To Move Together
Effective Corporate Tax RateBy Industry, 2007-2008
0%
5%
10%
15%
20%
25%
30%
35%
Uti
liti
es
Min
ing
Lea
sin
g
Tra
nsp
ort
Ag
ricu
ltu
re
Rea
l E
sta
te
Info
Tec
h
Insu
ran
ce
Ma
nu
fact
uri
ng
Avg
. E
ff.
Ta
xR
ate
Fin
an
ce
Co
nst
ruct
ion
Wh
ole
& R
eta
ilT
rad
e
Statutory Corporate Tax Rates By Region
20
25
30
35
40
45
50
55
'81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11
United States
OECD (ex-US)
Buffett Rule Is About Raising Capital Gains & Dividend Tax Rates
Buffett Rule Revenues & President's Budget Projected Spending
($ TN, 10-Year Estimate)46.96
0.050
5
10
15
20
25
30
35
40
45
50
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)
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
'73 '78 '83 '88 '93 '98 '03 '08
Energy Production Is Creating JobsNorth Dakota:
Oil Production vs. Mining Employment
0
4
8
12
16
20
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '120
4
8
12
16
20
Oil Production (Right scale, Millions of Barrels)
Mining and Logging Jobs (Left scale , in Thousands)
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?