Forget About the Fiscal Cliff! Increased Taxes & Austerity Measures Are Coming to the U.S. Regardless! Here's Why
Lorimer Wilson November 12, 2012Comments Off on Forget About the Fiscal Cliff! Increased Taxes & Austerity Measures Are Coming to the U.S. Regardless! Here's Why2,557 Views
It’s easy to find analysts and investors who are certain that a deal [to avoid the fiscal cliff] will be reached, or at least that the can will be kicked down the road to buy more time. It’s also easy to find more pessimistic views that are based on the lack of cooperation in the past, and a deeply polarized country and political system. However, I think many are missing the point, which is that austerity is coming to America – taxes are going up and government spending will be reduced – [and. as such,] the United States is likely to face a recession and market correction in 2013, regardless of whether or not a compromise is reached over the Fiscal Cliff. Words: 970
So says Trade In Mexico in edited excerpts from an article* posted on Seeking Alpha entitled Even With A Fiscal Cliff Deal, Stocks And The U.S. Economy Will Unravel In 2013.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.
The article goes on to say, in part:
A belief that everything is going to be fine as soon as clarity on a deal takes place appears to be false hope…
Consider:
how weak the U.S. economy is right now, even after nearly $1 trillion of borrowed money was spent by the U.S. Government in order to provide economic stimulus and “shovel-ready” jobs and
that the “Bush tax cuts” have continued to relieve businesses and consumers of higher tax rates.
These two factors have given a huge boost to the economy for the past couple of years, and without them, the economy would have been much worse. That is the big problem.
Deal or no deal on the Fiscal Cliff, taxes are going higher, and the level of U.S. Government spending is going to dwindle because the nearly $1 trillion Obama stimulus package is done, and current levels of spending on defense, entitlements and other areas are also not sustainable and are poised for budget cuts…
To get a sampling of what the combined impact of higher taxes and reduced government spending might feel like in 2013, all we have to do is take a look at Europe. Italy, Spain, Portugal and Greece have all raised taxes and cut government spending in the past couple of years, and the resulting effects have been quite devastating. It did not take long for unemployment to spike and economic weakness to set in as consumers and businesses also cut spending.
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We are already seeing signs of the above in the United States in advance of a potential Fiscal Cliff deal as:
corporations become more cautious, horde cash and reduce hiring,
consumers become more cautious as even companies, like McDonald’s, see same store sales drop for the first time in 9 years,
industrial companies, like Caterpillar, signal a slowdown as it recently reduced earnings guidance for the next couple of years.
The stock market is [also] starting to reflect the realities facing the United States:
the Standard & Poor’s 500 Index, which trades for about 14 times earnings, has begun to trade lower and currently is just slightly above the 200-day moving average. I expect it to break below that key support level in the coming weeks and months which is likely to spur additional selling pressure.
This country and its economy have been driven largely by borrowed money for many years, and that party is coming to an end. While the Obama stimulus plan and postponement of budget cuts has masked and delayed the real weakness in the economy for the past couple of years, that bandage is coming off soon.
Investors should consider getting very defensive in advance of 2013, when the effects of rising taxes and budget cuts will bear down hard on the economy…A recession and stock market correction in 2013 seems almost inescapable based on common sense.
The United States has a massive debt problem, which now stands at about $16 trillion and is expected to grow by about $1 trillion annually in Obama’s second term. The average American seems to be in the dark or in denial about this debt, just as many Spaniards and Greeks were a couple of years ago.
If we continue to vote in politicians who will promise to give us more and not take away what we have now, the debts will grow and eventually spiral out of control. We need an adult to tell us we can’t have any more candy, but we are not electing “adult leaders” that tell us what we don’t want to hear.
Until true reforms and solutions are found to cut the debt and bring solvency to essentially bankrupt programs like Social Security, Medicare, student loans, and even the post office, there is little chance for a robust and secular economic rebound in this country.
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Conclusion
Our economy has been held together by unsustainable government spending and Federal Reserve manipulation. If a true bottom had been reached in this economy, the Federal Reserve would not need to be intervening again and again. While some hopeful signs have emerged in housing and in other areas due to the stimulus and QE3 programs, that is likely to unravel in 2013. The real…economy (not the one that has been artificially propped up to win an election) and austerity is coming to America, whether it is induced by politicians or by the markets.
Excessive exposure to stocks makes little sense at this time. When, and if, true reforms are passed, and the debt is reduced to manageable and responsible levels, it will be time to get fully invested. However, raising cash and mostly limiting stock exposure to short-term trading opportunities (cash-rich companies that can continue to grow in a weak economy & buying stocks near the end of the year that have been depressed by tax-loss selling, and then selling them in a January rally when the end of tax selling and short covering allows the stocks to rebound.) is the smartest way to enter 2013.
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
What is the “Fiscal Cliff”? What would its ramifications be? Will it tip the U.S. into a recession? What are the critical economic building blocks that would be adversely affected? How best should you position your portfolio for such an eventuality.
We all know that high debt is a growth killer and, at the moment, the U.S. has a budget deficit of about $1 trillion. That’s a very big number…The question is, at what point do countries have to deal with high debt levels? How high do debt levels have to be before one has to deal with the problem by lowering budget deficits? Also, what are the consequences of such debt and budget reductions? Words: 500
“Portfolio managers have been swayed by hope over experience” when it comes to anticipating the effects the fiscal cliff will have on markets. Investors aren’t giving as much attention to the fiscal cliff as they should be, and that may be helping to set the markets up for a repeat of last year, when the debt ceiling negotiations sent stocks plummeting.
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
Under current law, a sharp reduction in the federal budget deficit between 2012 and 2013 will cause the economy to contract but, the Congressional Budget Off ice projects, will also put federal debt on a path more likely to be sustainable over time. To illustrate the eff ects of fiscal tightening, CBO compared its projections under current law (the “baseline” projections) with projections under an alternative set of policies — two scenarios in a broad spectrum of choices – in the infographic below.
The U.S. federal government is scheduled to implement a fiscal tightening of unprecedented severity (approx. 5% of GDP) at the start of 2013. The last time a tightening of such proportions occurred (3% of GDP in 1969) it presaged a recession. Thus, unless mitigated by an act of Congress, we expect the fiscal cliff would lead the U.S. into a recession in 2013. Below, in 26 charts, we examine all aspects of the impending crisis to gauge its potential impact on the credit markets and, by extension, our strategic investment recommendations.
This post shows JPMorgan’s estimated probabilities on four different fiscal cliff outcomes, conditional on who wins the presidential election in November.
Unless the government acts quickly, it is probable that the term “fiscal cliff” will become a household phrase over the next few months. Unfortunately, this is reminiscent of the budget ceiling crisis about a year ago. In this report we will explain what the cliff is, discuss the worst case scenario, and determine what, if anything, you should do about it. Words: 1436
The International Monetary Fund, the U.S. Congressional Budget Office, the National Association of Manufacturers and many other authorities are now warning that with the largest tax increase in U.S. history — plus the largest government spending cuts our nation has ever seen – one of the deadliest financial crises in U.S. history is set to strike the U.S. economy beginning this coming New Year’s Day. Barring a miracle in Washington….. Words: 1028
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fiscal cliff] will be reached, or at least that the can will be kicked down the road to buy more time. It’s also easy to find more pessimistic views that are based on the lack of cooperation in the past, and a deeply polarized country and political system. However, I think many are missing the point, which is that austerity is coming to America – taxes are going up and government spending will be reduced – [and. as such,] the United States is likely to face a recession and market correction in 2013, regardless of whether or not a compromise is reached over the Fiscal Cliff. Words: 970
