“We saw gridlock in D.C. before the election and the same players are there now, in that we have a continuation of the Obama Administration, a Republican[-controlled] House and Democratic[-controlled] Senate,” Schoenfeld, BNY Mellon’s senior investment strategist, said at the luncheon Thursday at Cherokee Town Club in Buckhead. “The big question is what will be the changes in the tax code as a result of Bush tax cuts, which are set to expire at the end of this year.”
The Obama Administration said there will be retention of the Bush tax cuts, except at the highest level of income, which is the source of disagreement, he said.
Despite recent talk of another recession hitting the country next year, Schoenfeld said it is “highly unlikely.”
“This could actually turn out to be a long business expansion, which will be slow and frustrating in a lot of ways, but we don’t see recession around the corner,” he said. “With this relatively slow [economic] growth, … inflation remains low. The Federal Reserve and other central banks are adopting and overtly pro-growth strategy.”
One guest asked, “What are we seeing in terms of inflation, and do oil and food prices affect it?”
Schoenfeld said overall inflation is at about 2 percent.
“The Federal Reserve is the policy maker that can ultimately affect inflation rates,” he said. “But the Fed knows it has no control over oil prices. It’s a global price and often a result from developments in the Middle East. It’s the same for food. It is out of the Federal Reserve’s control.”
Schoenfeld said one important aspect of the fiscal cliff is the Social Security pay roll tax, which is worth about $95 billion.
“Everybody working will see some increase of a payroll tax of this year. It will affect the first quarter [of 2013],” he said.
He suspects there will be a temporary measure put in place to get through the beginning of the year.
“I doubt they can have an overhaul of the tax code in the same session,” Schoenfeld said.
In regard to unemployment, the rate has decreased to 7.9 percent but businesses are still reluctant to hire, and Schoenfeld does not expect much growth in the near future.
There are 4.3 million more unemployed people since two years ago, he said. However, there are now 4.5 million people employed since the recovery started.
“Given that we had a very intense recession, we’ve made progress,” Schoenfeld said. “There’s not a lot any single individual could have done to alter this course.”
Schoenfeld said other main concerns in the market are “macro” issues, including factors like a weak housing market, slow growth in China and Middle East geopolitical tensions, along with the “Euro Zone.”
Schoenfeld said Europe’s current major recession certainly affects the U.S. economy because every major American financial institution has counterparty transactions including European banks.
“Europe is in a serious recession,” he said. “It’s not evenly experienced. Germany is still doing relatively well.”
But he said other countries, like Greece, have taken hard hits and Spain’s unemployment rate of 25 percent matches that of America in the Great Depression.
“How do you solve it? If you focus strictly on fiscal austerity [like Greece], you’re not going to solve problems. You make it worse, … That was a lesson for the U.S.,” he said. “You need economic growth, not just raising taxes endlessly or cutting wages endlessly.”