Thursday, December 13, 2012

Going Off The Cliff: What Are The Likely Consequences?

I know that if no agreement is reached, the lower long-term capital gains tax rates go away -- but the only long-term capital that I am considering selling actually will be a loss, and one large enough that it will provide me $3000 losses every year for a long ways into the future.  I am increasingly unsure whether going off the cliff will be a good thing or a bad thing for the stock market.  It will likely be bad for the economy as a whole, but even that, I am not entirely sure about.

To the extent that it forces increased tax revenues and reduced spending, it will reduce future deficits.  This is good for the economy long-term.

To the extent that it creates uncertainty, it will discourage business investment, perhaps bringing down stock prices and certainly doing short-term damage to the economy.

To the extent that the collapsing economy brings down interest rates (and yes, during the Depression people actually bought negative yield corporate bonds), it might cause an increase in purchases of dividend-paying stocks.  On the downside, expiration of the Bush tax cuts means dividends are again subject to regular income tax rates.

I am really in something of a quandry about whether to sell a couple of mutual funds that I have held since the 1990s and which, for reasons that I do not understand, are worth a good bit more than I paid for them, but still are considered to be capital losses if I sell them now.  Is it possible that going off the cliff could cause stock market increase?

Please: comment on what you think the results will be of the children failing to play nice together in Washington.

3 comments:

saltrifle said...

I think they will come to some sort of an agreement, so your question is probably moot - even if the agreement is a month or two after the dive off the precipice.

The interesting question is: what is the end result of the whole thing.

My guess: stick it to the wealthy (the majority want to do that). This will actually stick it to small business, which is why small business confidence has dropped dramatically recently. And, since wealth is defined in terms of annual income, with no averaging, it means sticking it to folks who realize a one-time gain (like me selling my retirement investment house, sigh).

End result: Government still sucking up 25% of GDP (as opposed to WW-II end to Obama level of 20%), some improvement in the economy (folks can only hold off spending so long) followed by significant inflation.

I personally have gotten most of my money out of stocks. I think the market is only being held up because, at the current negative interest rates, nothing else pays any income. That will change, and the market will dive.

That will happen for almost all possible political outcomes.

James B. Shearer said...

... for reasons that I do not understand, are worth a good bit more than I paid for them, but still are considered to be capital losses if I sell them now. ...

Probably this is because you have been automatically reinvesting distributions and your cost basis is the sum of your initial investment plus the amount of the distributions which you have reinvested over the years.

Jon said...

I wish I had my crystal ball fully functional, Clayton. I've been wondering about these same things for several months, and figure, since I'm more than a decade away from retirement, I might as well just stick to my long term strategy and see if we get through the next four years all right. I am holding on to a large percentage of cash in my brokerage account, just in case we get a big "correction" and I can buy some more dividend paying stocks at a bargain basement price.