On taxes, deficits, interest rates and the economy, Greg Valliere, chief strategist at Potomac Research Group, is clear: The U.S. is experiencing a “self-sustaining recovery, mediocre at best,” but one that will give the U.S. a 2% GDP growth rate for the rest of the year. No immediate inflation threat looms, he says, but uncertainty over crucial tax issues like the Bush tax cuts, the AMT fix and the estate tax will linger until mid-December.
On entitlement issues, Valliere (left) is just as clear: “There’s a chance for Social Security reform in the next year or so,” and Obama’s health insurance law, the Patient Protection and Affordable Care Act, will be overturned by the Supreme Court.
The “increasingly dark cloud” overhead is whether Congress will extend the Bush tax cuts, Valliere told attendees on Tuesday at the Investment Management Consultant Association’s (IMCA) annual conference in National Harbor, Md., just outside Washington. “This is going to be a ferocious fight,” he said. Deciding whether to extend the Bush tax cuts will be just one of four critical issues that Congress will have 20 days to grapple with during what Valliere called one of the “most significant” lame duck sessions after the November elections.
The other three issues Congress must resolve are tax extenders like the Alternative Minimum Tax fix; the potential cuts to defense under the sequestration that’s set to kick in because the deficit committee failed to reach an agreement; and come December, the return of the debt ceiling fight.
Said Valliere: “I cannot see the estate tax going back to $1 million, and I cannot see the dividend tax going from 15% to ordinary income.”
After “dozens” of talks with those on Capitol Hill, Valliere said that “nobody knows for sure what’s going to happen—that’s very uncertain for the markets.” What Congress will likely do, he predicts, is “extend everything until March 31, and then we’ll have to go through this all again.”
While some have argued that “we need an election to give a resolution to these issues,” Valliere continued, “I would argue that the gridlock could get more intense after the election,” because, for one reason, President Obama is the “narrow favorite” to win the election, “but there’s a good chance the next Congress will be more conservative than this one.”
The House, he said, will retain its Republican majority after the election, and the looming issue in the Senate is that 33 seats are up for grabs, and of the 23 of those held by Democrats, “10 look very vulnerable.”
As for interest rates, Valliere said he’s convinced the Fed will keep interest rates near zero for some time. “This is the most accommodative Fed in my entire career,” he said. And, he predicted, the Fed has not abandoned the idea of QE3.
In the geopolitical realm, Valliere said the markets would have to worry about Europe, Israel and Iran.
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