Best of the Week
Most Popular
1.Gold Price Crash Through Key Support, Crude Oil in Freefall - Clive_Maund
2.Marc Faber Warns Japan's Bond-Buying Program is a Ponzi Scheme - Bloomberg
3.Silver Price and Powerful Forces - DeviantInvestor
4.Stocks Bear Market Catastrophe as Stocks Flash Crash to New All Time Highs - Nadeem_Walayat
5.Marc Faber Warns Not to Hold Any Gold in the U.S. - GoldCore
6.U.S. Housing Market San Francisco at Critical Mass - Harry_Dent
7.Global Scramble For Silver - Coins “Hard To Get,” “Premiums Likely To Jump” - GoldCore
8.Major World Stock Market Indices Analysis: SPY, QQQ, DAX, FTSE, CAC, HSI - Michael_Noonan
9.Japan's kaput?! - Axel_Merk
10.Tesco Empire Strikes Back, £5 off £40 Discount Voucher Spend Explained, Exclusions Warning! - Nadeem_Walayat
Last 5 days
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14
Currency Wars, the Ruble and Keynes - 21st Nov 14
Stock Market Investor Sentiment in The Balance - 21st Nov 14
Two Biotech Stocks Set to Double on One Powerful Catalyst - 21st Nov 14
Swiss Gold Poll Likely Tighter Than Polls Suggest - 21st Nov 14
Gold's Volatility and Other Things to Watch - 21st Nov 14
Australia Stock Market and AUD Dollar Analysis (ASX200 and AUDUSD) - 21st Nov 14
New Algae Research May Have Uncovered an “Energy Forest” Under the Sea - 21st Nov 14
The Cultural and Political Consequences of Fiat Money - 20th Nov 14
United States Social Crisis - No One Told You When to Run, You Missed the Starting Gun! - 20th Nov 14
Euro-Zone Tooth Fairy Economics, Spain Needs to leave the Euro - 20th Nov 14
Ebola Threat Remains a Risk - New Deaths in Nebraska and New York - 20th Nov 14
Stock Market and the Jaws of Life or Death? - 20th Nov 14
Putin’s World: Why Russia’s Showdown with the West Will Worsen - 20th Nov 14
Making Money While The World Burns - 20th Nov 14
Why This "Quiet Zone" Is Now Tech Stocks Biggest Profit Sector - 20th Nov 14
My Favorite Stock McDonalds Just Got Kicked Off My “Buy” List - 19th Nov 14
European Economies in Perpetual State of Shock, What's Scarier Than Deflation? - 19th Nov 14
Breakfast with a Lord of War and Nuclear Weapons - 19th Nov 14
The U.S. Economy’s Ebb and Flow - 19th Nov 14
What You Need to Know Before Investing in Alibaba - 19th Nov 14
Forget About Crude Oil Price Testing 2009 Low - 19th Nov 14
What Blows Up First? Part 5: Shale Oil Junk Bonds - 19th Nov 14
Bitcoin Price Did We Just See an Important Slump? - 18th Nov 14
How to Profit From Oversold Crude Oil Price - 18th Nov 14
Stock Valuations Outrunning Profits Growth - And the Band Played On - 18th Nov 14
ECB Buy Gold Bullion? Japan's Monetary Policy Dubbed "Ponzi Scheme" - 18th Nov 14
Gold, Silver, Crude and S&P Ending Wedge Patterns - 18th Nov 14
How High Could USD/JPY Go? - 18th Nov 14
On Obama and the Nature of Failed Presidencies - 18th Nov 14
Globalism Free Trade Immigration Connection - 18th Nov 14
An Epiphany From Hell - Buy Gold and Silver - 18th Nov 14
Too Difficult to Get a U.S. Home Loan - 18th Nov 14
Has the Gold Bear Trap Been Set - 18th Nov 14
Gold Price and Miners Soar on Huge Volume - 17th Nov 14
Cameron Says Second Global Economic Crash is Loomin, Japan in Recession - 17th Nov 14
How to Play the Stock Market 2014 Year-End Rally - 17th Nov 14
What The Fed Has Wrought, Who Needs Wage Earners Anyway? - 17th Nov 14
Stock Market Indexes Fluctuate Along Record Levels - Will Uptrend Continue? - 17th Nov 14
Stock Market Trend Deceleration Tends To Precede Corrections - 17th Nov 14
Stocks Bull Market Set to Continue After Consolidation - 17th Nov 14
The World Is Run By Fools, And We Let Them - 17th Nov 14
Gold Price Golden Bottom? - 17th Nov 14
Gold Dragons Grand Strategy - 16th Nov 14
Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - 16th Nov 14
Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - 16th Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

Urgent Fiscal Cliff Investor Actions to Take Now

Companies / Investing 2012 Dec 17, 2012 - 07:30 AM GMT

By: Money_Morning

Companies William Patalon III writes:The prospects of a "Fiscal Cliff" impasse are causing more nightmares in middle class America than Freddy Krueger did on Elm Street.

But Permanent Wealth Investor Editor Martin Hutchinson has a surprisingly contrarian take on the escalating tempest.


Indeed, when the Obama Administration took a hardline stance yesterday and said it's "absolutely" willing to go over fiscal cliff unless it gets what it wants, Martin made his own feelings crystal clear.

"Let them jump," he said.

Martin's sentiment was based on economics, not politics. There's been so much fear-mongering and political obfuscation that most Americans have lost sight of what's really at stake here, Martin said during one of our talks last week.

"Bill, it's all such rubbish," the former global merchant banker told me. "As I said to you when we first started talking about what's become known as the fiscal cliff, it makes a lot of sense just to go over."

Before you grab your heart in mock horror, let us make sure you understand a key point. The feckless crew down in Washington has a lot of folks believing that this whole debate is about dodging the pain - forever. That phony safety pitch is what Martin is referencing with his "rubbish" comment.

"Some of our leaders want us to believe this debate is about avoiding the pain of higher taxes, another recession, a spike in unemployment, an inability of businesses to grow and hire," Martin said. "The truth is that there's no way to avoid the fallout from the fiscal mess this country now faces. We can either accept the pain now, or be forced to face it later. And if we wait, the pain will be far more excruciating than most Americans can even imagine."

Let's look at what Martin means.

To do that, let's use a vastly simplified version of a study by the Congressional Budget Office (CBO) - the agency that provides nonpartisan budgetary analyses to our elected lawmakers.

The term "fiscal cliff" was coined to describe what will happen if a package of Bush Administration tax reductions is permitted to expire, even as a series of spending cuts take effect.

The implication is that the U.S. economy will be shocked into recession - pushed over the "fiscal cliff." What the term doesn't convey is that there would be an accompanying reduction in the U.S. deficit of some significance.

What the CBO did was to create two scenarios - a "baseline" scenario in which the country is toppled over the cliff, and an "alternate" view in which Washington "rescues" (term is mine) America with late-in-the-game compromises.

The results may surprise you, since they run counter to the spin we're getting from Washington.
Under the alternate, or rescue, scenario, Washington dodges the fiscal cliff, most likely avoiding a near-term recession. Taxes and other revenue remain around the historical norm of about 18% of U.S. gross domestic product (GDP). But public debt rises from 69% of GDP in 2011 to 100% by 2021 and to roughly 190% by 2035.

U.S. debt as a percentage of GDP hasn't been that high since it peaked at 109% just after World War II. If we do see such a spike, you can bet it will impact the nation's ability to grow and create jobs.

In fact, a 2010 study conducted by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland - found that for countries with debt-to-GDP ratios "above 90%, median growth rates fall by 1%, and average growth falls considerably more."

Compare that to the CBO's baseline projection, the Nightmare on Main Street scenario that the Beltway SpinMeisters want us to believe should be avoided at all costs.

By implementing the required spending cuts and letting the tax reductions expire, taxpayers would feel a bigger bite and overall federal revenue would rise to 24% of GDP. The higher revenue coupled with the lower spending would lower U.S. debt, interest payments and federal budget deficits for year.

Deficits would fall from 8.5% of GDP in 2011 to 1.2% in 2021. According to the CBO's calculations, the accumulated deficit for the 2013-2022 period would be slashed from $10 trillion to $2.3 trillion - a reduction of $7.7 trillion.

The bottom line under the CBO forecast: We'd probably see the economy slow to near-zero growth in the first half of the New Year, with a rebound to 2% or more in the second six months.

In the long run, however, the big cuts in debt issued each year, interest payments and the worrisome yearly budget shortfalls would lead to much higher growth, and would give this country the economic muscle needed to better compete with such emerging economic leaders as China.

"I agree that we'd probably have a mild recession in the near term - but it would be a mild one because we no longer face a financial crisis," Martin said. "And having a mild recession in the near term because we've taken such pro-active steps to clean up the economy is much preferable to harsher ones that will increase in both frequency and intensity down the road if we let U.S. debt become an even greater imbalance."

Even better: Slashing debt will finally solve the job-creation problem that's been plaguing this country for half a decade.

"By reducing debt, you're reducing what the government sucks out of the U.S. economy - which is very good for small businesses," he said.

So if you believe the two sides will fail to get together, resulting in an impasse that shoves the country over the fiscal cliff, what should you do to get ready? While most investors are panicking, you can celebrate the U.S. economy's good fortune - and your own as well, by making these three moves:

  1. Take Stock of U.S. Stocks: In general, U.S. stocks will likely take it on the chin. That doesn't mean you should dump stocks and run, however. It means the broad market indices will do poorly, so careful stock-picking will carry the day over set-it-and-forget it indexing. Financially sound companies with solid dividends will also stay in style.

  2. Twin Catalysts for U.S. Treasury Bonds: A reduction in debt will be good for the country's credit rating. And that upbeat outlook for America's finances will make U.S. bonds look even more attractive than the offerings of our debt-ridden counterparts overseas. At the same time, the deficit-reduction efforts will result in the U.S. government issuing less debt, reducing supply. The increase in demand coupled with the drop in supply should supercharge U.S. Treasury prices. Martin recommends the iShares Barclays 20+ Year U.S. Treasury Bond Exchange Traded Fund (NYSE: TLT).

  3. Currency King: Martin says the big winner will be the U.S. dollar. It makes complete sense: If we clean up our act so that there's more confidence in our
    economy, it follows that there will be a renewed confidence in our currency, as well. Expect the dollar to rally big against other currencies for that reason alone. Plus, the greenback has a correlation coefficient with the U.S. Standard & Poor's 500 Index of negative 0.79, meaning it moves almost perfectly opposite the direction of this key U.S. stock index (and that inverse correlation has been increasing, according to researchers with the Bespoke Investment Group). So if the S&P 500 were to fall, as Martin predicts, the dollar will rally by almost the same magnitude. To capitalize on a projected dollar rally, Martin has two suggestions - depending on how speculative you wish to be. His first suggestion is the PowerShares U.S. Dollar Index Bullish Fund (NYSE: UUP). Although this unleveraged fund tends to trade in a tight range in normal markets. But during times of panic, it can make big moves - and quite quickly, too. It shot from $22.50 to $27 in late 2008 and from $22.75 to $25.75 in a rally in early 2010. For a more-speculative play, take a look at the triple-leveraged PowerShares DB 3X Long U.S. Dollar Index Futures ETN (NYSE: UUPT).

"A shove over the fiscal cliff will create a lot of market hysteria, but those who believe that's the ultimate outcome and position themselves ahead of time will do quite nicely if that happens," Martin concluded. "And, speaking frankly, I hope that's what happens. It would certainly fix a lot of the problems the economy faces and would increase the odds for higher growth going forward. Now if we can only get them to do something about the regulatory environment, too ..."

Source :http://moneymorning.com/2012/12/17/three-fiscal-cliff-moves-to-make-right-now/

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

© 2005-2014 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

Free Report - Financial Markets 2014