Fiscal Cliff Deal Averts the Crisis… But Now What?

[Editor's Note: A last-minute deal means the U.S. has avoided the fiscal cliff. Since the agreement was completed after we had gone to press, we have decided to follow up today's issue with a special edition from Keith Fitz-Gerald that breaks down the deal...]

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[Singapore] – It's late Tuesday evening and I'm about to go on air with CNBC Asia in Singapore regarding the impact of the Fiscal Cliff bill which passed minutes ago after Republican leaders decided not to try and tack on amendments nor engage in further bickering.

Passed by a 257 to 167 vote, the bill is now headed to the White House and a draft may even be on the President's desk by the time you read this.

So I'll have to write quickly.

Here's the scoop on the fiscal cliff deal:

  1. The Bush-era income tax cuts become permanent for the majority of workers while they expire for so-called "top" earners. The break is at $400,000 for individuals and $450,000 for couples. That's approximately double Obama's campaign level and 80% more than his preferred "married couples rate" according to various sources. Dividend tax rates and capital gains rates for top earners will rise to 23.8% while personal exemptions and itemized deductions that are presently in force expire for individuals earning more than $250,000 and married couples earning more than $300,000. The alternative minimum tax is now fixed to avoid snagging still more middle class households.
  2. Expanded unemployment benefits will continue.
  3. Automatic spending cuts are deferred for two months.
  4. A two percent payroll tax cut expires.
  5. Estate taxes will get an inflation indexed exemption of $5 million or more and taxes will top out at 40%.

Key takeaways on the agreement:

  1. Once again Washington is kicking the can down the road. While it's already being played up by both parties as an example of bipartisanship, it's really a load of hooey. The bill merely puts off decisions for yet another round of fiscal follies a few months from now.
  1. Instead of working diligently for the past year on a meaningful tax bill overhaul and a serious fix to entitlement programs, our leaders dithered, bickered and postured until the last minute. It's an irresponsible and disgusting abuse of the public trust. Anybody trying this kind of nonsense in the private sector would be summarily fired for cause.
  2. The deal actually raises taxes on 77% of American households according to the CBO and the non-partisan Tax Policy Center. That's an appalling failure in my book. The top 1%, incidentally, will pay $73,633 more in taxes on average. That's also according to the Tax Policy Center. It will also add another $4 trillion to deficits over the next decade. How is this a win for America?

My take on the markets:

The fiscal cliff bill passed only a few minutes ago so traders around the world are just beginning to react. However, I've already talked with key contacts in Hong Kong, Tokyo, Frankfurt and London to gauge what we might expect here at home come Wednesday morning.

I see three distinct possibilities:

First, as I suggested last week, the fiscal cliff deal is likely to prompt a short-term rally because it eliminates short-term worries. The problem is that nobody knows what short term means. Do not forget that the fiscal cliff is only one of three upcoming problems in our ongoing fiscal madness. There's still the debt ceiling, sequestration and the complete lack of a budget to contend with. In other words, it's on to the next crisis now.

Second, Asian markets are already enjoying a strong run this morning (your evening) as I write this. European futures are on the move, too. But, professional traders may see right through this and, in fact, begin selling the news leading to a down day when U.S. markets close Wednesday afternoon. The question at hand is whether or not they feel confident enough to remain "risk-on" or pick up their toys and seek safety while selling into strength.

Third, we could get a weak opening but then the pros go bargain hunting based on "oversold" conditions and a short "burn." Many traders, in fact, sold heavily into New Year 's Eve and now they've got to unwind those short positions in a hurry if Asia and Europe continue to take things higher between now when I am writing to you and early Wednesday morning when you read this.

How the fiscal cliff deal impacts individual investors:

For the most part, this will be a non-event. Yes…a non-event, especially if you are following along with a disciplined investment approach like the 50-40-10 Strategy I advocate in our sister publication, the Money Map Report.

While there is no question we will face yet more financial hurdles, I don't see any of the changes being larger than the potential gains associated with 3-5-10 year growth targets when it comes to the "glocal" stocks we prefer. So barring a massive sell off that hits our trailing stops, expect dips to remain consistent with the 10% rise I see ahead for the S&P 500 in 2013. Whether or not it finishes at that level remains to be seen but that's a story for another time particularly as we get a clearer look into the Q4 earnings season which kicks off shortly.

I envision gold having another solid year along with other commodities as it becomes clear that the market will place a premium on capital preservation as a result of yet more fiscal nonsense – deal or no deal.

And finally, I actually see the U.S. Dollar strengthening following this evening's news. It won't be immediate; if anything the dollar will drop a bit on news following the fiscal cliff deal. But down the road a bit things will be different when traders begin to focus on yet another looming downgrade and the comparative safety of the US greenback.

It's not that the fiscal cliff bill is anything even remotely resembling financially astute management, but rather that it's "business as usual."

And that means the dollar, which is the best-looking horse in the glue factory is alive and, evidently, still kicking.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Werner | January 2, 2013

    Hi Keith,
    Thanks for your analysis which raises a point I have got serious doubts about. The rise of the Dollar looks questionable to me, in as much as people have got to realise that the US government just cannot repay its debit, worse may even intend not to repay it or only in form of highly devalued Dollars. But there again, the markets irrationalities might prove me wrong.
    The issue will look a litle clearer in a week or two, the first few trading days being rarely a good indicator of what will happen.
    2012 has proven Anglo-saxon's pessimism on the Euro overdone though I would not bet much on it either. So what's really left besides precious metals?

  2. L.A. Papa | January 2, 2013

    Mr. Fitz-Gerald:
    Having followed this closely for several years, you are mistaken – and worse, continue to promote the falsehood – that both parties are to blame for "dithering'.

    Have you not examined the proposals of Mr. Ryan and Mr. Cantor? Although the MSM does not report truth any longer, it is a fact that the House PASSED a bill on April 13, 2012 which specifically addressed the problems of Medicare & so-called entitlements. Obama & Reid refused to consider it.
    The House did what they were supposed to do. The president stonewalled, and Reid made threats about changing the rules again to suit himself. Who is irresponsible????

    For God's sake, at least you could tell the truth – this problem is primarily due to Obama & the liberals' refusal to scale back a far too large government and cut spending – even in programs where their own reviewers admit there is fraud & abuse.

    Further, most fiscal conservatives – who are largely Republicans – do not think this is "bi-partisanship". It is clearly an arrogant, incompetent, and socialist president winning his agenda with the complete support of the Democratically-controlled Senate. He does this by abusing our system of government, by ignoring honest, working Americans, and pandering to welfare recipients, unions, socialists, and other leftist groups.

    Having witnessed first hand the sickening, outrageous voter fraud in Philadelphia on election day, I assure you, this president holds office without half of the electorate's support – and with none of informed, intelligent, and/or honest Americans', who are disgusted with his arrogance.

    • Steve | January 3, 2013

      Which comes from a greedy persons mouth !! How big must your house be ? How many cars do you need and do they have to be Mercedes , Audi's, or BMW's ? How many vacations do you need a year? Is a gated community on a golf course a necessity ? Are your steaks Filet Migon ? Do you need that very expensive restaurant weekly, or maybe daily ? You've lost the moral concept of live and diluted it with greed. Just wipe your feet, you don't need to remove your shoes at my house.

      • Owen K. | January 7, 2013

        Steve, if someone eats steak or even if someone is greedy, what is that to you? How is your life made any better by knowing that someone cannot afford a golf membership or a BMW? How does someone else loosing the (your) "moral concept of life and diluted with greed" affect your personal station in life? Does it make you feel morally superior? Sounds like it to me. So, go ahead, Steve, feel superior if you must, but remember that your so called "moral superiority" doesn't put food on the table, nor does it pay the tax man. So, go ahead and envy those or even hate those who do have the BMWs, Audis, etc. if you must. But in the end, it isn't going to elevate your station in life one bit.

  3. Norman Taber | January 2, 2013

    THE POOR ARE STILL THE CHEAP MONEY SUPPLIERS

    The poor still have not received a raise in minimum wage that is long overdue. In the negotiations there should have been an increase in minimum wage to $8.00 per hour now and an increase of $.50 an hour every six months until the minimum wage is $10.00 per hour. This would have increased the amount paid for social security and medicare, which would not have been drawn on by them for 35 to 45 years.
    Bank savings deposits paying only .001% and less is not fair to the poor and the INSIDERS get to use the cheap money. A minimum rate should have been passed of .01%, because the INSIDERS will not increase it by the grace of their hearts. Now $1,000 in saving account eaarns less than $1.00 per year, not $1.00 a month that is still cheap money.
    Laws should be passed to force the Boards of Directors to respect their Fiduciary Duty to the stockholders, which the INSIDER courts will not enforce. The boards of directors vote large bonuses for normal management situations. $1 million a month salary is too much for any executive, because it is the employees that make the improvements in services to the customers and not the Glad Handers living with all life's expenses paid by the corporation. Buy backs do not effect the market prices of the stock, because most investors do not understand the financial statements that hide what is taking place. The IRS should give external auditors Special Audit Tests to perform and certify in search for tax evasion hidden in the accounts…

    MS Accountancy, Financial; Enrolled Agent; MSG(AOR)Ret, Junior Officer Qualified, French and German Qualified

  4. Dorothy | January 2, 2013

    Apparently this was the best thing to do at this point. Is there a better plan? If the taxes had increased (more than apprx 2%) on the middle-class, there could have possibly been more people requesting benefits such as food stamps and unemployment. From a personal stand point as I approach retirement, this may not be too bad of a deal. My taxes will increase apprx 2%, I can live with that. All working class people need to learn how to live on a budget. We shouldn't spend what we don't have. I have worked in the lending business for over 30 years, I've seen some things.

  5. david miller | January 2, 2013

    this is a diaster and it will only get worst. Unless the Republicans are willing to shut the government down as Newt Gingrich did in stopping Clinton, Obama will increase spending and taxes until we default in 2 years or less.

  6. DR SPIRO APOSTOLOU | January 2, 2013

    I am in total agreement with your Thinking , Analysis and Presentation .
    Great Job

  7. james | January 2, 2013

    Well said! The fiscal cliff has been avoided without even considering the fiscal metorite racing toward us all. We can all breathe a sigh of relief now for the next few…months?…weeks?…days?…hours?

  8. cathy lawhorn | January 2, 2013

    we need to shut government down like newt did in order to get anything done!!!!!!!!!!!or get a petition and lets impeach obama if not this world is coming to an end-this is no joke he will be our dictator -now is the time to take action!!!!!!!!!!!!!!!!!!!!!!!!!!lets do it!!!!!!!!!!!!!how dont know how to get a petition started

  9. jerry | January 2, 2013

    that is great. report… lets play boom bbcode…

  10. Steve | January 3, 2013

    Past articles have claimed the dollars is dropping. So why are investors all over the world buying dollars ?

  11. Kevin | January 3, 2013

    The USA will only fix its problems when they buy US made

  12. james | January 3, 2013

    All should read Senator Tom Coburn's MD his book The Debt Bomb. He is a republican who refuses to increase his term in office. He is in his second and last term in office and is laying it on the line for the public to understand. He has a Black on Black program to cut 9 trillion from the budget and get us back on track. Earmarks which he mentions and carreerism espceially among republicans have caused a major impasse for change. And the democrats have followed along with outrageous spending. Read up folks.James

  13. ed cook | January 6, 2013

    begin by congressional comitties examining every single expenditure for justification. Eliminate those un-nessary ones. Example military presence in all 198 countries in the world. Why maintain so many troops in Europe? Withdraw immediately from Afganistan. Cut and examine military wasteful spending. Cut pentagon staff by one half as studies have indicated one third would and could do the job, Term limits on congress, Same benefits as their constituents. Try to put our country first in decision making for Congress and president

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