US Stocks Overpriced, Even With Fiscal Cliff Deal

As the year winds down the stock market first went down and now has gone up recently all based on whether there is a deal on the fiscal cliff. As this is being recorded, if the recent sound bites from those corporate types supposedly in the know are legit, it does sound as if some sort of deal is likely. But who knows. It is a long way from here to there, wherever there is.

For the record, I approve any deal that minimizes tax increases. I also approve any deal that slashes future entitlements and current spending. That being said, I think the type of deal that does happen will not materially change anything.

Why? Without massive cuts in entitlements, which are not likely to happen in whatever deal the politicians come up with, the economy in 2013 will either continue to limp along or actually go into reverse depending upon how high taxes are raised.

Is a slow growth at best US economy worth a 15 times price earnings ratio for this stock market? I do not think so. While news of a deal might boost the stock market for a few days or even a week, longer term nothing has changed.

That is it. If there is a deal the most any deal could accomplish will be higher taxes and some cuts in entitlements, but nothing that will impact the pink elephant in the room that the administration keeps ignoring. The pink elephant is the $87 trillion present value of future entitlements, and that number is growing at $7 trillion a year in today’s dollars.

Without a deal taxes will grow by about $580 billion next year. With a deal, my bet is taxes would rise by about $200 billion. For those of you who care about the numbers, the details are in the text of this video on our blog site.

Meanwhile, real time data we look at is currently showing after tax income growing a bit faster then in October. My guess is that Sandy rebuilding is providing a boost to the US economy that could last through early 2013. Remember ,whenever a major weather catastrophe happens, America’s balance sheet takes a hit. However, incomes then go up as the devastated area gets rebuilt.

That being said, after tax income is likely now growing at an over $300 billion annual rate. With the deal I am guessing, after tax income growth slumps to $100 billion a year. Without a deal, after tax income will actually drop, decline by almost $300 billion next; How? Subtract from this year’s $300 billion in higher income, $580 billion higher taxes next year. That equals an economy contracting by almost $300 billion a year. So even if both a fiscal cliff deal and the Sandy boost continues, the US economy will be barely grow next year.

Future entitlements are bankrupting the US and no one seems to care, at least not enough to create a wave of support for massive cuts in future entitlements; something that really could make a difference.

FISCAL CLIFF INCOME TAX DETAILS.

Everybody seems to agree that the 2% 2010 payroll tax cut is gone and that will boost 2013 taxes by $120 billion. Higher tax rates on those making more than $500k would raise maybe $20 billion. Higher dividends and capital gains will boost collections by $20 to $30 billion. Then there is about $25 billion next year in higher taxes for Obama Care.

Tax cuts likely to be spared include those making less than $500K will save $180 billion. Corporate taxes will not go up by about $100 billion and keeping the Alternative Minimum Tax, will save another $100 billion.

My best guess if that if there is a deal taxes will go up by just under $200 billion instead of $580 billion without a deal.

Below you may find the video.