Fiscal Cliff Weapons of Mass Political Destruction

Here we are, less than five weeks before the Fiscal Cliff deadline, and the games have already begun!

Late last week, we saw the first round of “good news” — all scripted and performed exclusively for public consumption.

We saw the President and Congressional leaders smiling before TV cameras … promising to make a deal … vowing to be nice to each other.

But what we cannot see — yet — is all the action back stage.

That’s where the real battle lines are being drawn. And that’s where the true weapons of mass political destruction are being prepared …

Weapon of mass political destruction #1
Income Taxes and “Revenue Enhancers”

Obama promised during the campaign that he would end the Bush-era tax cuts for households making more than $250,000 a year; and immediately after election day he vowed not to budge from that pledge.

Meanwhile, however, most Republicans have taken the “No New Taxes Pledge.” They have virtually sworn on a stack of bibles that they will never raise taxes.

Therein lies the danger of political destruction for either side.

If Obama caves in, the post-election halo enjoyed by Democrats turns to horns.

And if the Republicans cave, their chances of winning any future election will be worse than those of one-term president George H. W. Bush.

It’s been 24 years since the day he declared “Read my lips, no new taxes!” at the 1988 Republican National Convention.

Yet, you probably still remember that day vividly — and so does almost everyone else 50 or older.

Why? Because he blatantly broke his pledge, an action that killed him politically forever.

And now the majority of Republicans have made precisely the same pledge — in writing!

Can they get around tax hikes with so-called “revenue enhancers” like elimination of tax deductions and loopholes?

Perhaps. But even if they do, their constituents aren’t stupid. Everyone knows — or will soon know — that revenue enhancers are little more than tax hikes in disguise

Weapon of mass political destruction #2
Social Security, Medicare and Other Entitlements

Both sides know that virtually ANY reduction in Social Security and Medicare benefits is political suicide.

They’d almost sacrifice their first born to avoid touching the issue.

And yet, they also know that, without changes in these two giant budget busters, long-term deficit reduction is an impossible dream.

So their only choice is to play a game of chicken, while daring the OTHER side to make the first move … and, they hope, take the brunt of the blame from angry voters.

Weapon of mass political destruction #3
Defense Spending

Global threats are NOT going away:

New, powerful terrorist enclaves have emerged in North Africa and Yemen.

Hamas has amassed rocket stockpiles in Gaza and Hezbollah has amassed even larger stockpiles in Lebanon.

A new Israeli-Palestinian war is about to explode even as the Syrian conflict continues to escalate.

Iran’s nuclear weapons program is accelerating.

And China’s military is continuing to grow by leaps and bounds.

So with this backdrop, it would be political SUICIDE for Republicans to allow more cuts in defense spending under their watch. And yet, the Democrats insist that meaningful budget cutting is impossible without them.

For the Democrats, it’s another political weapon they could deploy — threatening major defense cuts if they can’t get their way on taxes or entitlements.

Bottom line: This is going to be a DIRTY fight. And no matter what, it cannot end well. Regardless of the fiscal cliff …

•  If the two sides do NOT agree to make meaningful voluntary cuts in the deficit, the country’s finances will be in shambles, with all its untold consequences. But …

•  To the degree that they DO make big cuts, it will gut the economy.

My advice: Invest with caution! That means you must …

1. Avoid the garbage — our lowest rated stocks that are most likely to crash and burn in the wake of this fiscal crisis

2. Deploy hedges as needed. Use them to protect against downside risk and even make money from market declines.

3. Buy exclusively the cream of the cream — investments that are likely to outperform in good times or bad.

Good luck and God bless!

Martin