Strategist David Nelson to Moneynews: Failure to Resolve Fiscal Cliff Is ‘Political Suicide’

Friday, 09 Nov 2012 01:33 PM

By Forrest Jones and John Bachman

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Failure on the part of the White House and Congress to deal with a fast-approaching combo of tax hikes and spending cuts would be the equivalent of “political suicide” for the country's leaders, said David Nelson, chief strategist of Belpointe Asset Management.

At the end of this year, the Bush-era tax cuts and other benefits expire at the same time cuts to government spending are set to kick in, a combination known as a fiscal cliff that could send the country into a recession next year if left unchecked by Congress.

Uncertainty surrounding the cliff is prompting investors to avoid equities, even safe-haven stocks that pay steady dividends such as utility companies, over fears taxes may rise on investment income.

"Dividend stocks have been really the anchor of the market for the last several years. They are under pressure, and as a matter of fact as I am speaking right now, utilities are probably one of the worst-performing sectors today," Nelson told Newsmax TV in an exclusive interview.

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"It is simply because of the likelihood of an increase in the dividend tax rate. It makes things like utilities just not as attractive as they once were," said Nelson, also a Moneynews contributor.

Further fueling uncertainty are fears that the president's healthcare overhaul law, widely known as Obamacare, may also call for tax hikes on investment income, namely on dividend payments and capital gains.

Simply put, the White House and Congress have to agree on ways to prevent sudden tax hikes and spending cuts striking the economy at the same time and wiping out what little recovery the country has experienced up to now.

"I think in terms of coming to some sort of resolution regarding the fiscal cliff, I think it is political suicide for Congress and the Senate and including the president to not come up with a deal, so I am pretty confident there will be a deal."

One issue plaguing investors is the lack of change that the elections brought about, which has nerves on edge that political brinkmanship that marked the 2011 debt-ceiling debacle may return during talks to avoid the fiscal cliff.

"Things are really as they were the day before the election. President Obama is still the president, the Democrats control the Senate and the Republicans control the House, and they all seem to have their heels dug in," Nelson said.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

"I am not hearing any change in the rhetoric. Everybody seems to be talking like it was the day before the election, and I think investors are starting to get concerned that there won't be some sort of deal on the fiscal cliff prior to the end of the year."

Republicans and Democrats are preparing to negotiate a way to avoid the cliff, with taxes serving as major hurdle.

Democrats have been clamoring for tax hikes on wealthy Americans but favor extending the Bush-era tax cuts for the rest of the country, while Republicans have said taxes shouldn't rise on anybody but have proposed closing loopholes.

One party right now has the advantage.

"You have to give it to the president right now. He won the election," Nelson said.

Some seem to be willing to compromise, including House Speaker John Boehner, whose recent comments appeared to reflect a conciliatory note.

"It looked like he was holding out an olive branch, it wasn't much of an olive branch but it looked like for the first time they were willing to accept some sort of revenue increases. Something possibly beyond just tax reform," Nelson said.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

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