This Week in Barrons – 12-9-2012
The Fiscal Cliff – Watch that First Step!
We're seeing a market torn apart by a lot of opposing forces. The big one is the threat of the ‘fiscal cliff’, where on January 1st (if we don't get a compromise) there will be higher taxes and automatic program reductions put in place. This is why many companies have decided to pay out dividends now, so that they're taxed at this year’s rates versus possibly being taxed at the much higher rate next year. But with the path we’re on as a country, it really doesn’t make that much of a difference whether we hit the “fiscal cliff” or not. Certainly if both sides of the aisle stand staunch and don't reach a compromise, the ‘fiscal cliff’ will speed up the arrival of the nightmare. Both sides are bickering over tax increases of a few hundred Billion dollars over 10 years. Excuse me, but we ‘racked up’ $1.6 Trillion in debt THIS YEAR. This was simply tossed on to the $15.7 Trillion in debt that we already have – and then people realized that we’re going to hit our spending ceiling again (very soon) and we have to raise the debt level (again).
Treasury Secretary Geithner suggested this week that we don't even bother Congress about the debt ceiling any more, that we should have an unlimited debt ceiling. If that wasn’t so sad, you could laugh – but allow me to explain. Let’s assume that the US was a stand-alone nation – creating and consuming everything within our borders. As more and more people decided to use the benefits of our social programs such as Disability, Social Security, Medicare, Medicaid, Food stamps, Welfare, Unemployment payments, etc. – eventually there would be a problem when outflows of dollars from those funds exceeded the inflows created by hard-working people. At that point the Government would have to resort to printing more money. But given we’re just trading within our ‘four walls’; a nation could live like that for a long, long time. Of course in the end, the hard-working folks would look at themselves and say: “What – are we nuts? Why are we working when we could do nothing and get paid too?" And eventually the nation would die, NOT because of the debts or even the inflationary printing, but because no one would want to work to produce the fuel and products we all need.
Now, because we are NOT an isolated nation – but rather trading in our currency on a daily basis – the question that always comes up is: “What is that dollar worth?” I.E. when we buy oil from Saudi Arabia and pay in dollars, they constantly evaluate the value of that dollar. If the dollar was backed by something physical, then the foreign producers could feel good about accepting them for their hard work and resources. But when Mr. Geithner says “let’s have no debt ceiling and just borrow for as long as we wish”, every trading partner on the planet is looking on in disbelief. Saudi Arabia doesn’t want our inflated dollars any more. They still drudgingly accept them, because that is the way the system is set up around the world, but we see some interesting things taking place. It is now common for virtually all of our trading partners to instantly take those dollars and rush out and buy up "real things". For example the Chinese are using dollar denominated assets to buy up land, buildings, toll roads, oil, coal, iron, gold and silver. Brazil has gone so far as to call us a currency manipulator, and has imposed tariffs on our imports. The reason we're facing an economic crisis of epic proportions is not simply: (a) because we're becoming a socialist state, (b) because many of our jobs have gone idle and our standard of living is falling, (c) because of our spiraling debts, (d) because of our horrific inflation in food, education and medicine, but rather it’s because the rest of the world is tired of selling us goods and services in return for paper that is constantly worth less.
Our politicians can argue over the fiscal cliff all they want, but it’s like the Captain of the Titanic wondering where to place the deck chairs. Yes, falling over the fiscal cliff will cause some sharp and immediate economic pain, but in the grand scheme of things it changes nothing. This is why I've been harping on Gold since 2001, and Silver since 2007. By the way, if you live in California, New York City, or Hawaii, and if we go over the fiscal cliff, the highest marginal taxpayers will be paying over 50% of their income in taxes. How long do you really think individuals and corporations will continue to pay over half their income in taxes? You will see more ‘off-shore’ banking and tax loopholes being taken advantage of than ever before. Government revenues won’t increase – but rather individuals and corporations will just manage their businesses differently.
First: The Ben Bernanke is going to give us a Christmas present this week by replacing the outgoing "twist" with some new version of pumping billions in to the system. (Yawn). Despite the Billions that The Ben Bernanke has printed:
- The DOW is at the same level it was in March,
- 500,000 people stopped looking for work, and
- 370,000 people had to sign up for first time unemployment.
Unless The Ben Bernanke replaces the twist with something much bigger, the market will yawn about it. We already know what $80 billion a month has given us. Will anyone rejoice over $85 B – nope!. But if Ben shorts out and goes crazy, hiking the buying to say 100 billion, then yes – the market will pop higher on the news.
Secondly: The Unemployment Data released on Friday was nothing short of embarrassing. According to the Bureau of Labor Statistics we made 146,000 new jobs last month and unemployment fell to 7.7%. Are you kidding me? You're asking me to pay no attention to:
- the adjustments in the past 2 reports which removed 50,000 jobs from each monthly total,
- the household income which fell - again,
- the unemployment rate going down because of another wave of folks leaving the job market.
These numbers are basically fake, and will be revised over the next several months.
Finally: For all you chartists, if you look at the big picture over 20 years, you see a pretty classic "jaws of death" pattern – basically a huge megaphone. In the past this has always led to a massive melt down. Soon we will be entering the sixth year of all of the QE-type gimmicks – that have been used to keep us treading water. During that time food stamps have hit an all time high and continue to grow, and the amount of people signing up for disability has outpaced the amount of folks getting a job. We now face: (a) higher taxes, (b) increased costs associated with Obamacare, and (c) foreign nations not wanting our treasuries or our currency. It is my opinion that at some point in 2013, the market will start to head south, and will do so in spectacular fashion.
But in the short term, we're still in a situation where everyone wants to end the year on an up note. December and January are usually two of the best months of the year for stock gains, and you can see how badly they want it to happen. It is still my guess that a "deal" announced concerning the cliff, will send stocks sharply higher and yes we'll end the year "up" and probably see good gains in January going into February. I’m trying to "lean long" for that very possibility. I think we "should" have one more market spurt higher and it could be a really strong one. But that will mark a multi generation high and we'll sink considerably lower from there. However, if we don’t get a ‘fiscal cliff’ deal by Christmas, I suggest we could see a massive sell off in a short time.
We sold out of AAPL for a nice profit this week – and depending upon Monday’s action – may dive back into it at the 535 level.
I’m beginning to hear more and more of this type of discussion that David S brought to my attention: Although gold prices hit a one-month low ($1,701.55 an ounce) this week, Peter Schiff (CEO of Euro Pacific Capital) and Anthony Grisanti (President of GRZ Energy), think that gold prices are going to come back with a vengeance. Peter Schiff says: “I think gold will go $3,000 to $5,000 higher. A lot depends upon how much money are we going to print? How long are we going to try to keep interest rates artificially low? And how long is it going to take before the world realizes that we’ve been conning them? The Federal Reserve’s massive easing over the past four years and the exploding U.S. debt burden are very bullish for the precious metal. We're asking the world to give us money indefinitely so that we can live beyond our means. When the world figures this out and decides it doesn't want to play this game anymore, it's going to mean a much bigger drop in the dollar. Consequently the Fed will have to print even more money to keep interest rates artificially low, and gold prices will skyrocket."
My current short-term holds are:
- AAPL – in at 525.35 (currently 586.30) – stop at 572.00
- DBA – in at 28.30 (currently 28.82) – stop at entry
- SIL – in at 24.51 (currently 22.46) – no stop yet
- GLD (ETF for Gold) – in at 158.28, (currently 165.14) – no stop ($1,704 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 32.03) – no stop ($33.05 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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