Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16
Fascist Business Model: Reich Economics - 19th Sept 16
Multiweek Correction in Gold and Silver Markets Continues - 19th Sept 16
Stock Market May Turn Ugly This Week - 19th Sept 16
China Is Digging Itself into a Deeper Hole - 19th Sept 16
Yellen’s Footnote 8 Would Put Interest Rates on Autopilot - 19th Sept 16
Central Bank Digital Currencies: A Revolution in Banking? - 19th Sept 16
UK Government Surrenders to China / France to Build Nuclear Fukushima Plant At Hinkley Point C - 19th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

What to Expect If We Go Over the Fiscal Cliff?

Politics / Taxes Nov 16, 2012 - 07:06 AM GMT

By: Money_Morning

Politics

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: I'm on the road this week in Las Vegas and Los Angeles and receiving lots of great questions as usual from your fellow Money Morning subscribers.

Here's a few that really caught my attention. Not surprisingly, one of the biggies deals with the fiscal cliff.


Q - What happens if we go over the "fiscal cliff"...really? - Jerry S.

A - Nobody truly knows Jerry. However, here are five things I expect to happen as a result.

First, the U.S. goes back into recession. The CBO (Congressional Budget Office) suggests there will a 0.5% contraction if the government can't stop both the debt and the spending cuts. That's a huge drop from the 2% growth it presently expects.

I think both numbers are complete fantasy, incidentally. The government missed this crisis in formation and they are flying blind now. How on earth they can predict 2% growth right now defies any sort of logic whatsoever. Then again, we are talking about the federal government. Sigh.

If we go over the fiscal cliff, I'm expecting as much as a full 1% contraction. And growth under the circumstances will hardly be normal, let alone 2% for years to come. The fiscal cliff and our politicians' unwillingness to do anything about it other than kick the can down the road so far makes it clear to me that America is going to struggle with the legacy of decades of bad fiscal policy for years to come -- just like Japan has for more than two decades.

Second, I think companies are simply going to vote with their wallets under the circumstances. Many are already hoarding dollars and announcing changes to operations following the election, but now they're going to cut back further on capital spending.

At the same time, the fiscal cliff will reduce foreign direct investment into the U.S. because many companies will shift their attention to other markets where there is more certainty.

Third, the unemployment rate will rise, housing markets will reverse course, and the Fed will engage in yet more meddling and more money printing. It will no doubt be well intentioned, but simply digs America further into a hole.

Fourth, the government will continue to raise taxes on the "rich," only they will broaden the bag so as to sweep in much of Middle America. People who are content to think this strategy applies only to the "super rich" haven't yet keyed in on how broad this net will actually be. I think they're in for a rude awakening.

As part of this process, I expect Congress to make a grab for retirement assets, and attempt to force those who want to save for their future to save for Washington's future as a part of some sort of mandated savings requirement. Chances are they will engage in some tax reform when it comes to municipal bonds and other income- oriented investments, too.

Fifth, the markets will falter and perhaps even correct by 20%, as Marc Faber recently suggested on CNBC. No doubt that's going to stink on a variety of fronts. But a retracement will also put a slew of great companies on sale and create unbelievable opportunities in everything from gold, inverse funds, certain bonds, and especially the "glocal" stocks we prefer.

I don't share Washington's optimism that things will magically get fixed, which is why we've been preparing Money Morning readers and those of our sister service, The Money Map Report, ahead of time for this contingency. As part of that, we've been selling into strength, picking up metals and tightening up our trailing stops.

Having bought into the markets off the 2009 lows, I am not anxious to see subscribers lose the gains many are sitting on if they have followed along with our recommendations.

Now's not the time to take anything for granted, especially when it comes to your money.

Q - I'm worried that the short sellers who were so problematic a few years ago will reappear and tank the markets. But I don't hear a lot about it right now...why? - John S.

(Editor's Note: John's referring to the naked short sellers who made headlines early on in the financial crisis because of the amount of money they made betting that the prices of stocks (and other investments) would go down.)

A - Super question. There are a few factors at work. First, coming off the March 2009 lows, it's been very hard for short sellers to establish positions because hard rallies don't tend to create a lot of opportunities. Second, much of the short selling was conducted by institutional traders working for big banks, in particular. They're under the microscope right now so it's not likely they are going to override their short rules again without incurring the wrath of an understandably angry public and deeply embarrassed regulators. Third, the SEC has tightened up the borrowing requirements for short sellers so it's no longer possible for more than one party to borrow the same shares of stock needed to effect the short. This reduces the number of shares available to short - in other words, there simply isn't as much fuel available for the bonfire ...

Q - How do you tell when institutions are getting cold feet and hedging? - Rhonda P.

A - Thanks for asking, Rhonda. Admittedly, this is more of an art than a science but here's what I look for.

First, volume will generally begin to fall off. When coupled with prices that are still rising, it suggests the big money is distributing their shares to late comers. Typically you will see a rash of headlines "blossom" around the same time, or analyst reports touting yet more gains to ramp it up as a means of inviting the last people to the party before the lights are turned out. That's why I frequently advocate selling into strength...because I'd rather be with "em than be left holding the bag they want to hand to unsuspecting buyers.

Second, looking at time and sales information, particularly for options on the big indexes, is a favorite of mine. When I see a "bloom" of activity that's headed in the wrong direction from the major averages, for example, I know that something's up...or about to be down.

Third, I look to the Commitment of Traders Report, or COT for short. Put out as a weekly report every Tuesday by the CFTC, it shows net long and net short positions for commercial and non-commercial traders. What makes this report interesting is that it frequently shows when traders shift from one side of the fence to the other, many times in advance of bigger market shifts.

Q - Loved your recent comments in the Wall Street Journal article on collectibles; I'm also an avid motorcyclist. I'm wondering if now's the time to diversify into other collectibles too? - Randy Z.

A - Thanks, Randy. One of these days we're going to have to put together a Money Morning ride. I hope you'll join in when we do.

As for collectibles, there's no doubt they can provide significant portfolio diversification. However, there's an important caveat - when you want to sell, collectibles are only worth what a buyer offers.

Sometimes that's a lot, but sometimes that's not. Collectibles pricing is closely related to overall economic conditions and the specificity of the collectible. The market for Picasso is very different, for example, than the market for early Chinese bronzes.

In closing, please keep those great questions coming. I enjoy receiving them and love answering them even more. You can send them to: keith@moneymorning.com

Source :http://moneymorning.com/2012/11/16/five-with-fitz-what-to-expect-if-we-go-over-the-fiscal-cliff/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife