Governing & Campaigning In A De-Leveraging Environment May 2012 Daniel Clifton

219 Days Until Election Day Here Is What Was Happening 219 Days Ago 8/26: Hurricane Irene Was Expected To Hit The East Coast But Didn’t 8/25: Berkshire Hathaway Invests $5BN In Bank of America 8/24: Steve Jobs Resigns As CEO of Apple 8/23: 5.9 Magnitude Earthquake In VA That Is Felt Up To Boston. Punch Line: A Lot Can Happen Between Now & The 2012 Election

Pre-Election Election Outcome Mapping Out The Next 200 Days Lame Duck Congress Policy Implications

2012 Pre-Election

Countries Representing 50 Pct World GDP Changing Presidencies

Struggling Economy = Unpopular Incumbents

Large Budget Deficits & Debt Limit New Fiscal Policy Stimulus…

…And Austerity Is Needed, Which Is Not A Winning Political Strategy Forecast, Congressional Budget Office

Austerity or Stimulus?

Traditional Political/Equity Cycle Did Not Materialize In 2011

Equity Markets Wait To See Who The Election Winner Is

Monetary Policy Is Now Shouldering The Stimulus Burden…

…But The Bill Comes Due Post-Election The fiscal cliff approaching is about $537bn in The election will have an outsized impact on how the issue is resolved. But we are skeptical the entire drag can be offset in Forecast , 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

2012 Election

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 Are Key: Obama In A Grey Area

President Is Slowly Inching Closer To 50 Pct Approval Rating

Growing Economy = Growing Probability For Obama Win

Employment Headed In The Right Direction For Obama Victory No President Has Been Re-Elected With An Increasing Unemployment Rate. Conversely, Every President With A Decreasing Unemployment Rate Won Re- Election

Employment Growth Helps But Is Not The Entire Story

As Gasoline Prices Are More Correlated Than Employment

Elevated Oil Prices Could Lead To Broader Economic Concerns

Consumer Sentiment Has Been A Good Predictor of Reelection

After-Tax, After-Inflation Income Is The Best Predictor of Re-Election

This Number Has To Go Higher For The President To Win

Geopolitical Events Will Loom Large Over The Political Landscape In ‘12

Consensus Pointing To A GOP Sweep In Congress

Congressional Approval Rating Points To Anti-Incumbent Election

But Generic Ballot Is Not Showing A “Wave” Against GOP

Governing In Lame Duck & 2013

REMINDER: NEW CONGRESS FACES A MASSIVE FISCAL CLIFF The fiscal cliff approaching is about $537bn in The election will have an outsized impact on how the issue is resolved. But we are skeptical the entire drag can be offset in Forecast , Joint Committee On Taxation, Congressional Budget Office, Strategas

The Challenge: Below Trend Economic Growth…

…With A Rising Debt to GDP Ratio…

…& Net Interest Costs Set To Explode Despite Low Interest Rates

$537BN Fiscal Drag Is Broad Based

Fiscal Drag Is Twice The Size Of The Largest Post WWII Tax Increase

Two Catalysts For A Lame Duck Tax Bill: Debt Ceiling & AMT

Three Lame Duck Scenarios Consensus Election Result: Obama Pushes Bowles Simpson, Republicans Object. GOP accepts short-term tax cut extension for debt ceiling increase. Status Quo Election Result: Who has the mandate? Fight over high income tax cuts? Temporary debt ceiling extension? Republican Sweep: How does Obama handle this? Do Republicans wait?

2013 Fiscal Deal?

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.

Supreme Court Ruling On Healthcare Could Be A Catalyst

Projected Healthcare Spending Looks Unsustainable Forecast, Congressional Budget Office, Office of Management and Budget

Tax Reform Is The Best Way To Deal With The Fiscal Cliff But Challenging Forecast, Congressional Budget Office

Buffett Rule Is About Raising Capital Gains & Dividend Taxes

Dividend Tax Rates Set To Triple Without Congressional Action

Companies Are Pushing For Corporate Tax Reform

Cannot Do Corporate Tax Reform Without Individual Tax Reform

The Fed Is Hurting Social Security

Top 10 Federal Spending Programs Exceed Tax Revenues

Despite Catalysts, High Turnover Could Make Reform Difficult

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

What To Watch For President Obama’s approval rating Real per capita disposable income Congressional generic ballot test Supreme Court ruling on healthcare Fed policy: Operation Twist continues? Fiscal cliff negotiations Iran negotiations Social unrest in the U.S.