1. Governing & Campaigning In A De-Leveraging Environment May 2012 Daniel Clifton dclifton@strategasrp.com

2. 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

3. 1. 2012 Pre-Election 2. 2012 Election Outcome Mapping Out The Next 200 Days 3. 2012 Lame Duck Congress 4. 2013 Policy Implications

4. 2012 Pre-Election

5. Countries Representing 50 Pct World GDP Changing Presidencies

6. Struggling Economy = Unpopular Incumbents

7. Large Budget Deficits & Debt Limit New Fiscal Policy Stimulus…

8. …And Austerity Is Needed, Which Is Not A Winning Political Strategy 2012 -2021 Forecast, Congressional Budget Office

9. Austerity or Stimulus?

10. Traditional Political/Equity Cycle Did Not Materialize In 2011

11. Equity Markets Wait To See Who The Election Winner Is

12. Monetary Policy Is Now Shouldering The Stimulus Burden…

13. …But The Bill Comes Due Post-Election The fiscal cliff approaching is about $537bn in 2013. The election will have an outsized impact on how the issue is resolved. But we are skeptical the entire drag can be offset in 2013. Forecast 2012-2021, Joint Committee On Taxation, Congressional Budget Office, Strategas

14. 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

15. 2012 Election

16. 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

17. Approval Ratings Are Key: Obama In A Grey Area

18. President Is Slowly Inching Closer To 50 Pct Approval Rating

19. Growing Economy = Growing Probability For Obama Win

20. 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

21. Employment Growth Helps But Is Not The Entire Story

22. As Gasoline Prices Are More Correlated Than Employment

23. Elevated Oil Prices Could Lead To Broader Economic Concerns

24. Consumer Sentiment Has Been A Good Predictor of Reelection

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

26. This Number Has To Go Higher For The President To Win

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

28. Consensus Pointing To A GOP Sweep In Congress

29. Congressional Approval Rating Points To Anti-Incumbent Election

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

31. Governing In Lame Duck & 2013

32. REMINDER: NEW CONGRESS FACES A MASSIVE FISCAL CLIFF The fiscal cliff approaching is about $537bn in 2013. The election will have an outsized impact on how the issue is resolved. But we are skeptical the entire drag can be offset in 2013. Forecast 2012-2021, Joint Committee On Taxation, Congressional Budget Office, Strategas

33. The Challenge: Below Trend Economic Growth…

34. …With A Rising Debt to GDP Ratio…

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

36. $537BN Fiscal Drag Is Broad Based

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

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

39. 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?

40. 2013 Fiscal Deal?

41. 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.

42. Supreme Court Ruling On Healthcare Could Be A Catalyst

43. Projected Healthcare Spending Looks Unsustainable 2012 -2021 Forecast, Congressional Budget Office, Office of Management and Budget

44. Tax Reform Is The Best Way To Deal With The Fiscal Cliff But Challenging 2012 -2021 Forecast, Congressional Budget Office

45. Buffett Rule Is About Raising Capital Gains & Dividend Taxes

46. Dividend Tax Rates Set To Triple Without Congressional Action

47. Companies Are Pushing For Corporate Tax Reform

48. Cannot Do Corporate Tax Reform Without Individual Tax Reform

49. The Fed Is Hurting Social Security

50. Top 10 Federal Spending Programs Exceed Tax Revenues

51. Despite Catalysts, High Turnover Could Make Reform Difficult

52. 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

53. 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

54. 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.