Welcome to the Fiscal Farce!

Our elected representatives have proven themselves to be a group of remarkable jerks. They have transformed the Fiscal Cliff into the Fiscal Farce. They scored a political triumph by increasing taxes on the rich while postponing any spending cuts for another 60 days. The message to the American people is, “We are willing to raise your taxes and thereby curtail your spending while leaving 8% of you unemployed. At the same time we refuse to cut out so much as our daily lattes.” In consideration of this brilliant statesmanship, this same Congress wanted to give itself a raise (it has since been voted down)! By the way, the payroll tax hike is not a modest increase on many lower income families: 2% of someone’s gross income matters when people are struggling to make ends meet.

The revenue increase from this tax hike amounts to just over $60 billion per year while leaving in place over $1 trillion in deficit spending.

The national debt continues to grow at a robust pace. We continue to afford our generation a lifestyle that is beyond our means and for which our children and grandchildren will pay. Meanwhile, GDP growth, if any, will be very modest in 2013.

So why are the markets cheering? My guess is that compared to what could have been, the key components of this last-minute deal are supportive of economic growth in the near term. Roughly 99% of Americans will not only retain the Bush-era tax rates, but these rates will become permanent. This eliminates the future uncertainty over taxes – an uncertainty which the market abhors.

Moreover, we wrote in a previous Market Commentary that consumers don’t make spending and investment decisions based on temporary or transitory changes in their finances. Middle-class America now has pretty good visibility as to its future tax liability. Payroll taxes will revert back to prior levels, which will increase the tax burden modestly on all families. In addition, higher-income Americans (the top 1% or so) will see higher tax rates of 39.6% on income and 20% on capital gains.

Middle-class Americans (extending well into the upper-middle class) can now be confident that their rates will not go up. Armed with increased tax visibility, these middle class Americans will be more likely to continue spending their money. This is positive for the economy in the near term.

Still this last-minute deal avoided all tough decisions on spending. The sequestration “can” was simply kicked down the road, entitlement spending was left out, and the impending debt ceiling was not addressed. Given that we have avoided $110 billion in government spending cuts (for now), we can be incrementally more confident that the economy will not fall back into recession this year. Furthermore, is it such a stretch to believe that Congress will simply delay these cuts again in March? The smart money would probably say no. The stunning problems of profligate deficit spending, ever-expanding national debt, and no plan to reduce spending remain undiminished and undeterred.

Why should investors remain cautious? Because the deal agreed upon last night simply represents more of the same. This political stalemate is nowhere near done, and Washington continues to avoid the tough decisions that will get our country back on a sustainable fiscal track. First and most importantly (by far), Congress and the administration refuse to address the problem of entitlements, which account for the overwhelming majority of our problem. Second, the $110 billion in mandatory spending cuts known as the sequestration has only been delayed for a couple of months. Combined with the need to increase the debt ceiling at around the same time, it appears as though we are in store for Fiscal Cliff Redux.

Keep your seatbelts fastened! Investors should be cautious. This leadership vacuum in Washington is shameful. Our government has missed yet another opportunity to put this crisis behind us and move the economy forward. But, as long as spending cuts are delayed, the government cash spigots remain open, and share prices will likely be supported. It will be nice while it lasts, but woe to him without a seat when the music stops!