What's a little conjecture among friends? And Greg Valliere, chief political strategist at Potomac Research Group, dished out his best two cents worth of prognostication regarding the intersection of the upcoming elections, the Bush tax cuts and the markets at the Schwab Impact conference in Boston on Wednesday.
Valliere said he expects Tuesday's election will result in a split decision in Congress: The Republicans will take the House, but the Democrats will maintain a very slight Senate majority. The election itself should alleviate some of the uncertainty that's been hanging over the markets, he said. That, and ensuing gridlock that would likely result from an ascendant GOP in Washington, could actually be good for the markets.
"For investors, gridlock is good because it means there's less chance they [Congress] can do harm," Valliere said, as the audience chuckled.
Valliere got a bigger reaction when he laid out a possible post-election scenario for Democrats if the party suffers heavy losses next week. In parliamentary systems, he said, when a particular party gets spanked at the polls, party leaders often get sacked. As such, he expects House Speaker Nancy Pelosi to resign her post within 72 hours if the Democrats get pummeled. That comment elicited a round of applause from the packed general session audience.
More important, Valliere said, is what a resounding Democratic defeat would mean for President Obama. Will Obama pivot to the political center like Bill Clinton did after Republicans gained control of Congress during the 1994 midterm election?
Valliere said the consensus holds that Obama is less likely to follow Clinton's centrist ways. "If he doesn't get off the activist path," Valliere said, "he could increasingly be seen as a one-termer and could be challenged within the Democratic party [for the 2012 presidential nomination]."
Valliere doubted Secretary of State Hillary Clinton would challenge Obama, saying her friends claim she can't stand several years of "Holiday Inns." However, he added, she might simply resign her current post before Obama's first term is over.
But Obama could face a challenge from the left in his party, largely because of his Afghanistan policy, which is losing support among Republicans as well. More significantly, a moderate Democrat like Indiana Sen. Evan Bayh might take him on, according to Valliere.
Elsewhere, Valliere opined that taxes pose a bigger issue than the election because Congressional inaction on the Bush tax cuts during the upcoming lame duck session would create an "ugly scenario" of a massive tax increase on income, dividends and estates starting January 1.
Given that a large number of Congressional Democrats in fear of their political lives want to extend the tax cuts, and that permanently extending them is fiscally foolish, Valliere said the odds are that Congress will probably reach a compromise to extend the tax cuts for two to three years.
Valliere expects-or at least, hopes-that Congress will do something on taxes by mid-December.
As for the estate tax that's languished in limbo throughout 2010, Valliere believes a likely resolution will include something along the lines of a 40% tax rate on estates of at least $4 million.
Regarding the economy, Valliere said the Federal Reserve is running out of ammunition to give it a positive jolt. Nonetheless, he doesn't foresee a double-dip recession. All in all, he said he's cautiously optimistic about the U.S. economy going forward.
But that's more than he can say about the national debt, which Valliere said is one of his two big worries. The other, he added, was lumped into a general geopolitical stew, comprising the threat from radical Islam, the deteriorating situation in Pakistan with its roughly 100 nuclear weapons and, referencing a recent article in Atlantic magazine, the growing likelihood of an Israeli pre-emptive strike against Iran's nuclear production facilities by next autumn.
And on that cheery note, it was time for happy hour.