Cliff hanger: talks stall in Washington

Negotiations over the “fiscal cliff” have stalled going into the weekend, causing consumer confidence south of the border to dip to a 4-month low.

Earlier this week President Obama said he is done playing games.

As reported in the Financial Times, he’s toughened his stance on budget talks, and is now demanding that Republicans agree to higher taxes on the rich.

He also expects to “increase borrowing limits as a condition for broader negotiations,” and refuses to bargain with Republicans over whether to increase the country’s debt limit.

But house speaker John Boehner is also taking a hard line, saying his party will only agree to raising the debt ceiling if Obama promises to cut spending equally.

The opposition has struggled, however, to remain united and find its footing in talks with the president, who was emboldened by his November election victory.

Speaking to business chieftains Wednesday, Obama warned Republicans not to inject the threat of a government default into negotiations over the fiscal cliff as a way of extracting concessions on spending cuts.

“It’s not a game I will play,” he said, recalling the brinkmanship of last year in which a budget standoff pushed the Treasury to the edge of a first-ever default and led to a downgrade of the U.S. credit rating.

While he’s willing to accept some reductions in government programs such as Medicare, he flatly rejects Republican contentions that they can raise about $800 billion in additional government revenue over a decade by closing loopholes and narrowing tax deductions on the wealthy.

The opposition argues increasing rates from 35% to 39.6% would impose a particularly harmful impact on the economy and job creation, but the White House has also ridiculed Republican plan as “magic beans and fairy dust.”

Though each side is standing strong, however, CNBC says new data suggests both sides will take a hit if a deal isn’t reached in the next few weeks. Check out this video from this morning’s news broadcast:

Dealing with the fallout

The heated fiscal debate is likely worrying your clients, causing them to wonder how their investments will be affected by fluctuating markets and the potential final deal.

While reassuring words from President Obama boost the market one day, hopes are quickly dashed the next, as Republican officials and the White House spar over what’s best for the U.S. economy.

And though the outcome will affect things like cross-border taxes and market movements, there’s a bigger problem at hand: many of your clients are getting spooked without first finding out what the term even means.

So, here are some tips to help you deal with nervous clients:

Define their fears

First, explain the term “fiscal cliff”—no matter how many news stories they’ve read.

Thomas Kenny, professional financial writer, recently called it “the popular shorthand term used to describe the conundrum the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect” on About.com.

First off, it involves an end of last year’s temporary tax cuts—resulting in a 2% tax increase for workers—as well as the end of some tax breaks for business owners.

In addition, there’ll be shifts in “the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law.”

More than 1,000 programs like the defense budget and Medicare are in line for deep, automatic cuts if agreements aren’t reached.

Read more on the three options faced by the U.S. government as the deadline looms.

To help clients out, send them a link to the Washington Post’s “fiscal cliff calculator”. It qualifies how six different types of families would have been affected by some of the options proposed in the past. It also breaks down tax differences for U.S. citizens.

The past repeats

Next, remind them issues like the debt ceiling and fiscal cliff have been negotiated over and over, for many, many years…..

If you read past and current coverage of these negotiations side by side, you’ll find them strikingly similar – and in some cases identical. If you look back over the last five, you’ll see headlines about Europe and the recession that could simply be re-dated and distributed without the majority of investors knowing the difference. (Don’t worry, we don’t do that).

Stephen Lingard, director of research at Franklin Templeton Multi-Asset Strategies, said last year that the ruckus over whether the debt ceiling will be increased was “a bit of a red herring.”

He added, “Since 1940 the debt ceiling has been lifted more than 70 times. If they didn’t raise it we’d be in so much trouble. I just can’t see policymakers making that kind of massive, devastating mistake.”

In addition, he said, “There’s [now] a little more sensitivity to fiscal recklessness globally. Longer term, the trends in the U.S.—the borrowing and fiscal position—are definitely worrying, but it’s a longer term story.”

Read more on how the U.S. needs to avoid becoming the next Europe.

Though markets are jittery, clients need to stay calm and simply keep an eye out for tax and market opportunities.

They also need to cap their expectations until markets become less volatile—we can’t all be Warren Buffett after all.

Read: Panicked clients? Here’s help and Tax planning in tough markets

Does risk equal reward?

For those with heightened risk tolerance, help them cut through the noise while also pointing out some undervalued assets. This can be as simple as listing off some tax-efficient ETFs that will provide them with wider market exposure.

Since major events are often priced into markets, informed investors use broader perspective and knowledge of trends to uncover hidden opportunities.

As Gerald Connor, chairman and CEO of Cumberland Private Wealth Management, says, “Knowing what to look for and having the skill and confidence to pick are two different things.”

He adds, “Younger people may not be able to execute, but those who have gone through tough times, and who know that the paradox of investing is consistent, are able to pull the trigger and recognize danger signs.”

Read: Taking advantage of the fear premium and Benefit from volatility

Connor reminds advisors to be realistic about clients’ limitations and risk tolerances, since leading them out of their comfort zone may result in mistakes and losses…..For more tips on how to help clients (along with a VIDEO about fiscal cliff negotiations), read on.

It can be better to stick with strategies like dollar-cost averaging, for instance, when dealing with people during gut-wrenching times.

Read: Is dollar-cost averaging smart?

Consider all headlines

Tame headlines and opinion pieces may be less thrilling, but they’re worth a read.

Take a recent Washington Post piece on how Wall Street is disregarding the fiscal cliff. Though the final deal will matter, it says markets have remained largely unaffected since the election this fall.

And though U.S. officials may act like there’s an ocean between them, they’ve crossed it before. Many financial execs and economists predict they’ll be a short-term extension of current tax policies, and that a deal will be reached in the New Year if the fiscal fighting continues.

Read: Investors on edge as U.S. debates

Also, check out this CNN video on how negotiations are going this week: