Michael_BloombergMichael Bloomberg was interviewed at length on CNN last night as part of their coverage of the failure of the Not So Super Committee.  I am an ex-New Yorker but have always followed the comings and goings of the city, including its politics. Bloomberg, in his third term, is getting tiresome to New Yorkers, but has been nothing short of a great mayor, from strengthening the economic base of the city to pedestrian walkways and car free streets at lunchtime.

He comes to it naturally – he is a billionaire, was once a Democrat. Is technically a Republican and is essentially an independent and owes nobody anything, admits and fixes mistakes and takes stands against special interests when he believes it is the right thing to do or if they simply get in his way.

And that is what he called for yesterday – for politicians to take a stand against their narrow self interest of getting re-elected next year. He blamed everyone for the Not So Super Committee failure. But that is not the important part of what he said – the insightful piece was about how 2012 could play out. And how he said it was very interesting as well.

The “what” was intriguing.  Bloomberg, in a few short sentences, laid out the most likely scenario for 2012 even if Obama has not declared it so.

What is it? Obama does nothing. If Obama does nothing and vetoes any changes to the bill creating the Not So Super Committee, the country not only gets $1.2 trillion in cuts over then years beginning in 2013 – it gets a $3.9 trillion in revenue increases over ten years as the Bush tax cuts expire, automatically, at the end of 2012. The $5.1 trillion in this total package is more than enough to satisfy bond markets and so on.

Bush_Tax_CutsAnd, said Bloomberg, a clear message from Obama about this course of action would end indecision and help the economy immediately. Bloomberg coupled his comments about this specific set of actions by adding that Obama could then say we know where we stand, now let’s tackle some real cuts and structural problems.

I write about this now for the logic of this scenario is irresistible and this is by far the most likely scenario to play out in 2012.  The do nothing approach by the president would a) put $1.2 trillion in cuts in pace for 2013 b) raise taxes on the wealthiest Americans, as he has promised to do pleasing not only his base by more than two in three prospective voters and c) put the Republicans in the terrible political position of raising taxes on the middle class in order to defend tax cuts for the wealthy. The Republicans have said will support no tax increases for anyone regardless of income, and Obama will translate that into supporting tax increases on the middle class.

Bloomberg went further along this line of reasoning – he said in wonderfully blunt terms that tax increases on the middle class are the only way to fix the deficit.  Spending cuts won’t do it. Spending cuts plus tax increases on the wealthy will not do it. You have to tax the middle class. The math is that simple.

That is the “what” that came from Bloomberg. How he said it was even more important in helping us forecast 2012.

Bloomberg, hardly a dynamic speaker, was passionate and compelling in his delivery. It was obvious he meant every word he said, he was angry, he was putting himself out there not fill air time but to make a point. And he did – his middle of the road approach is what respondents in survey after survey and poll and after poll endorse.

Why haven’t you heard this before? Because the media coverage has been about the Republican candidates and they are all pandering, catering, kissing the whatevers of the right wing of their party, the wing that dominates primaries and elects candidates for the general election. And in the general election this is a small percentage of voters – the largest chunk of voters is in the what could be called the

Bloomberg middle.

What does this mean for you, a trader or investor?

  • The Bloomberg scenario is the one most likely to play out. No changes to the $1.2 trillion in cuts for 2013, the expiration of the Bush era tax cuts at the end of 2012.
  • This combination could lead to a GDP hit of at least 1.5% in 2013, perhaps as much as 2.5%, due to contractions in disposable income and government spending. That means unemployment north of 11%.
  • No corporate revenue and income stream is safe in that kind of downturn and the market knows this. Once the strong possibility of this scenario becomes obvious to the lemmings on Wall Street, around the middle of next year, the weak economy, perhaps already in recession, will be the focus of traders and they will bid the market down. Investors looking longer term are already heading to the sidelines until after the election.  Traders wanting to sell, investors not putting in a bid. Not a good thing for the market in general.

Objections?

Objection Number One: The Republicans will win the White House and both houses of Congress and re-instate the Bush tax cuts. First of all, they will probably not win the Senate and even if they do, they will have less than 60 seats. Filibuster time, otherwise known as pay back time, otherwise known, in Democrat circles as “sticking it to the Tea Party is the best revenge.”

Objection Number Two: Obama will compromise and do something next year that will involve extending the Bush tax cuts? Keep dreaming – more than seventy percent of all voters, including almost 50% if Republicans think taxes need to be raised on the wealthy. Obama will argue the Republicans, protecting the wealthy, are letting taxes on the middle class go up.

Objection Number Three: Uh, c’mon, look at the economy, something’s gotta be done, they will do it, right? Sure, right, like the Not So Super Committee worked, right, or the grand deal struck by john Boehner and Obama made the light of day. As long as Tea Party types obstruct the Republican caucus on taxes, and Democrats say no meaningful cuts without meaningful tax increases, no deal can between the parties can be reached. None. That is not a political statement, it is reality.

What to do?

  • Trade Michael Bloomberg – his message I mean – be prepared for a recession in 2012 and a nastier one in 2013 regardless of the election’s outcome.
  • The stocks that will go up in this kind of market are real growth stocks – double or very near double digit growth. That means outfits such as Costco (COST), Amazon (AMZN), Apple (AAPL), Starbucks (SBUX), Whole Foods (WFMI), Cepheid (CPHD), and Newmont Mining (NEM) to name a few. Yes, there are more than a few.  (See my recent article “New Frugal” Trades).
  • If you are willing to lose capital put on some black swan trades – buy puts the S&P as if it were going to 885, it is now north of 1200. These will probably end up worthless but you never know what might happen in Europe.

And of course, Bloomberg might run for president, wouldn’t that be interesting. Stay tuned.

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