Jim Rickards has a message for investors and politicians monitoring talks between Congress and the White House to avoid billions of dollars worth of spending cuts and take hikes set to take effect January 1: Be careful what you wish for.
"There are only bad outcomes," says Rickards, a partner at JAC Capital Advisors. "Taxes are going up no matter what. It's just a question about whether they go up for everybody [failure to agree] or target certain people [agreement]. Either way you're talking about a tax increase in the middle of a depression."
Rickards says Republicans, who have so far opposed any tax increases, will eventually agree to higher taxes for the wealthy. "They've learned their lesson" from being bashed continually on their recent position, he says.
Politico, however, reported late Thursday that talks between the White House and senior Republican Congressional staffers got off to a slow start, featuring a GOP offer that includes freezing the Bush tax cuts, postponing tens of billions of dollars in automatic spending cuts for defense and reducing the inflation adjustment for entitlement spending.
Rickards ultimately expects Congress and the White House to reach a broad agreement before year-end that allows them to freeze tax rates, maintain spending with a continuing resolution and stop the clock on December 31. Then a final agreement will be reached by late January when the president delivers his State of the Union address.
In the meantime, Rickards advises investors to sell assets if they're sitting on large capital gains because those taxes, now 15%, will rise anywhere from 20% to 40%. "I don't know where that number will come out but I know it will be higher," says Rickards.
He says uncertainty about cap gains rates has already hurt stocks such as Apple, which has fallen 20% from its high of just over $702 on September 19. He expects the pressure from this uncertainty will continue to weigh on stocks until the end of the year.
Rickards says that, even if there is a fix for the fiscal cliff, there will still be plenty of unresolved issues affecting corporations, including repatriation of overseas profits, depreciation schedules and maybe investment tax credits. Says Rickards,"If you are a CEO, you can invest in India with more certainty than in the U.S."
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