At the end of this year, the so called “Bush tax cuts” expire and taxes go up across the board to Americans. This is known as the fiscal cliff, because raising taxes in a recession will hurt growth even more and toss the economy over the cliff. To make matters worse, the massive debt bubble across the developed world is getting worse as Bernanke and the Federal Reserve and the ECB print more money to lend to already massively over-indebted nations, thus creating more debt. It looks more like the house of cards was built over a cliff!
Something has to give as the answer to too much debt is NOT more debt. Simply servicing the debt reduces the amount of capital available for investment, further impairing current and future growth. Eventually the burden becomes so great, essential services and entitlements cannot be sustained, as you are caught in a vicious cycle of high unemployment and slow growth. If you thought this sounds like Greece… or Italy… or Spain, you’re right. But guess what? The U.S. is on the same path! This is the proverbial “Goliath” in my book “Facing Goliath – How to Triumph in the Dangerous Market Ahead” and what John Mauldin refers to as the “End Game.”
Recently the world’s eyes have been on Spain to see if they can pay their bills. They can’t- even if nobody wants to admit it yet. Spain sits with over 25% unemployment and a housing market that makes ours look like the Facebook area of Palo Alto. The ECB decided to throw $125 billion their way – after all, what’s $100 billion between friends? One would think this would be good news. Well, just moments ago just as I write this newsletter, Credit ratings agency Moody’s Investors Service cut its rating on Spanish government debt by three notches to Baa3 from A3, one little old notch above junk saying the newly approved euro zone plan to help Spain’s banks will increase the country’s debt burden. The world may finally be starting to wake up to the fact that financial assistance through debt is a bad thing.
The one thing the market does have going for is it is “you don’t fight the Fed,” meaning interest rates are so low, there is no place else to put your money. The Fed has made sure you can’t make money on riskless assets, therefore hurting savers by guaranteeing a loss on savings and risk free accounts after inflation, forcing money into risk assets. Case in point is J.P. Morgan’s recent (they say $2 billion, others say $6 billion) trading loss. Money is so cheap right now, and if you can’t make anything on it through lending, turning Wall Street into a Vegas style casino seems like a good idea… especially if the American tax payer is there to pay the bill!
Nevertheless, all this this cheap money could keep the market afloat for a while longer, although think in months not years. We will probably have to endure the summer doldrums, depending on what kind of “new” stimulus plan Bernanke gives us next week after the Fed’s June 19-20th meeting. Eventually the market will figure out that further stimulus through more debt hurts more than it helps, but until then stocks will rally on the promise.
None of us can just “sit in cash” at 2/10’s of 1% for long, so the key is to be “Tactical” and avoid buy-and-hold (buy-and-hope) at all costs. Be the expert or hire one. And be sure to have your personal exit strategy ready. If your advisor is not preparing you for this and or telling you not to worry because: “you’re in for the long haul, it’s only a paper loss,” or the worst one, “we’re buy-and-hold and the market always comes back”… run! Better yet, give me a call, while you still have some money left.
Of course you can’t sit in the bank earning nothing either. There are plenty of ways to make money in this market and in the dangerous market ahead, but the key is to do it without all the risk. Managing money, especially your own, is a daunting task… and that’s where we can help. Our “Invest for need, not for greed™” approach combined with our hands-on proprietary Top-Down Tactical™ investment management strategy can help you manage risk and deliver returns. If you would like to learn more and/or get a free second opinion on your portfolio, simply reply to this email, click our Appointment Request Form or call for a no-cost no-obligation consultation today at (916) 925-8900.
P.S. This week’s Smart Money with Keith Springer just happens to be about this very subject and is: Is the US on a Dangerous Path to “European-Style” Financial Crisis? -Learn how To Protect Your Portfolio From the impending “Fiscal Cliff”! Be sure to listen in on Saturday.