GO
Loading...

Kamen: Why We Won't Fall Off the 'Fiscal Cliff'

Candidates running for the House, Senate and Presidency invested an estimated $6 billion on their campaigns, and the rest of us probably devoted a collective 6 billion man hours to watching their ads, listening to pundits, viewing debates and reading commentaries.

Photodisc | Getty Images

And what happened? The President was re-elected, the House of Representatives will remain overwhelmingly controlled by incumbent Republicans and in the Senate, the incumbent Democrats remain in the majority. (How's that for a return on investment?)

Those "opinion" cable news networks and the large percentage of the press that pander to our stubborn desire to hear and read "news" that reinforces what we already believe are still trying to demonize the other side and keep the apocalyptic headlines coming. They're assuming that gridlock will not only continue but also lead to financial disaster.

So has nothing changed? In fact, I believe that things have changed, dramatically

I'm often accused of being an optimist, and while that's in my DNA, by profession I'm a realist. Regardless of one's own personal opinion of the election outcome, we have to acknowledge that had there been a total change in Washington, solutions to our fiscal woes would be even further away. We'd have had a protracted period of upheaval, with a battleground of new ideas being fought over in the name of reform. Instead, we know what ideology will be shaping the fiscal decisions of our country for the next four years.

What's more, I think there was an upside to the grueling campaign, as both sides revealed the other's critical flaws. Governor Romney criticized Barack Obama for not offering strong enough leadership and President Obama faulted the Republicans for seeming to callously protect the interests of "millionaires and billionaires." And guess what? President Obama in his acceptance speech noted that getting consensus is the mark of a leader, and John Boehner at his press conference indicated a willingness to be led by putting revenues back on the table.

Both sides are beginning to acknowledge that the world is not clearly Red or Blue but actually purplish. The same casts of characters are being returned to office with the realization that they kicked the can down the road to themselves. And in the short term "compromise" probably will stop being a bad word. That should allow our "leaders" to do the job we elected them to do, they get paid to, and they swore to do.

With the election over, it is in their (and their constituents') collective interest to finally deal with the pressing issues facing our economy. No one wants to be part of a group that goes down in history as having its hand on the wheel when the nation went over the "fiscal cliff."

It is most likely that there will be an agreement extending the status quo for six months to allow time to craft more deliberative changes to our tax code and entitlement programs. But while it might be overly optimistic to think that a semi-lame duck session of Congress can produce a "grand bargain" before year's end, that wouldn't surprise me either.

(Read More: What Is the 'Fiscal Cliff?')

I believe we are finally in the eighth inning of the game. While we are likely to experience significant gyrations in the market for the next six months or so, a resolution is in sight.

For once in our life there might indeed be a magical signal indicating that the bulls are about to charge: President Obama and Speaker Boehner stepping up to a microphone in the Rose Garden announcing they have reached a deal.

(Read More: Boehner Tells House GOP to Fall in Line)

What might that deal look like, and what does that mean for savers, investors and retirees?

One immediate issue as it potentially relates to your portfolio is the status of the preferential tax treatment of dividends and capital gains. The fear is that not only would the capital gains tax rate revert from the current 15% to 20%, but also (and of more concern) dividends would be taxed not at the current 15% rate but as ordinary income. That number could go as high as 43.4 % for top income earners, when you include the 3.8 % tax on unearned income mandated by the health care reform bill.

(Read More: What a Post-'Fiscal Cliff' Deal Will Cost US Households)

If a meaningful part of your investment implementation strategy employs the use of high-quality, dividend-paying stocks. Would a tax increase cause an immediate loss in their value? Though the situation is evolving, at the moment I'm not overly concerned.

To begin with, interest rates on short-term, fixed-income securities are going to be hovering around zero for the foreseeable future. Should the tax rate on dividends go higher, the after-tax dividend yields for many quality companies will still remain relatively attractive.

Even if a knee-jerk reaction to higher taxes causes dividend-paying stocks to fall, allocations to strong companies with great balance sheets are good places to have your money in uncertain times anyway. And a drop in the price of such stocks would effectively raise the yield that their dividends produce, making them even more attractive for tax-advantaged accounts—such as 401ks, IRAs, pension plans and charitable endowments--which would probably buffer any "tax-policy-related" decline.

Also of concern is whether we'll have another market meltdown as we did in the summer of 2011, when our political leaders couldn't play in the sandbox together, resulting in a downgrade of the U.S. credit rating. Even though we'll probably endure similar headline-driven angst, I believe that this time, constructive solutions to our fiscal problems will be found and implemented.

(Read More: 'Fiscal Cliff' Mess Is a 'Grand Canyon': Bill Gross)

We're about to get clarity on the issues exactly because things for the most part have stayed the same. We know exactly what footholds all the players have their heels dug into. Ironically, that has probably created the easiest, fastest path to a solution. (Consider how long starting from scratch with an entirely new cast of characters would have taken.)

(Read More: Fiscal Cliff: Complete Coverage)

And when the compromise is reached, Fox will be screaming at the Republicans for selling out, and MSNBC will be chastising President Obama for caving in. The hallmark of a successful negotiation is that neither side is entirely happy. If that happens, we'll all win.

Kenneth A. Kamen is a managing director of The Mercadien Group and president of Mercadien Asset Management and Mercadien Securities, as well as the author of the highly acclaimed book form Bloomberg Press, Reclaim Your Nest Egg: Take Control of your Financial Future.

Contact Fiscal Cliff