11/20/12 11:09 AM – Fiscal Cliff Rally

U.S. stocks have rallied about 3% since late Friday morning when the President and Congressional leaders made optimistic statements about fixing the so-called “Fiscal Cliff.”

Stocks usually do well Thanksgiving week but often drop Monday following, according to Art Cashin at UBS. That’s pretty much what I remember over the 28 years I have been doing this.

I think the Fiscal Cliff will get resolved somewhat between the return of lawmakers after the Thanksgiving break and the end of the year.

I can’t say that I am has happy as others are about that. It’s the same old game in our political capital as around the world – no one wants to deal with the real issues driving huge deficits. They just want to keep away the short-term pain because that is what markets and voters focus on.

If the U.S. keeps running trillion dollar deficits each year we will continue to see the credit rating of the U.S. downgraded, entitlements will keep growing rapidly out of control and we will see the interest rates on U.S. Treasuries rise, adding more of an interest payment burden to the budget. The further things get out of control, the more pain it will take to fix it. “Pay me now or pay me later,” the old Pennzoil ad, still rings true.

If we are not going to deal with this in any significant way now, it will not be good for anyone in the long term – not investors, not taxpayers, not voters and not the politicians who would not take leadership and be responsible to address the growth of entitlements, whether politically popular or not. And do not be fooled – the rich have nowhere near enough money to pay for closing our deficit for even one year. Taxing them more may have a part in how things work out but it will be far, far short of what is ultimately needed.

Think about it. Entitlements are almost 2/3 of the whole budget and are growing fast enough that the budget (and our taxes) will roughly double over the 10-12 years unless business soon picks up a great deal, which I don’t foresee. Think about that while you’re cheering our leaders’ success in not significantly dealing with the problem.

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