Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
The Federal Reserve And Drug Addiction – A Prediction - 27th Jun 17
Charts Show Why Emerging Markets Will Be an Essential Part of Your Portfolio Going Forward - 27th Jun 17
Former Lehman Brothers Trader: I Bet My Reputation That Stocks Bubble Will Pop In A Year - 27th Jun 17
US Bonds and Related Market Indicators - 27th Jun 17
Stocks At Record Highs: Market Sentiment Still Bullish - 27th Jun 17
Stock Market Running Out of Steam - 27th Jun 17
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

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

© 2005-2017 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