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The Fiscal Cliff's Biggest Surprise Could Be a Rising U.S. Dollar

My grandmother Mimi had a saying that was as blunt as it was uncouth. "When the stuff hits the fan," she used to say, "it will not be evenly distributed."

This one came up often when she sensed that world events were about to take a turn for the worse.

You've heard me mention Mimi before. She was widowed at a young age and went on to become a savvy global investor long before people thought to look beyond their own backyard.

Mimi never cared what Wall Street's "Armani Army" had to say.

Instead, she preferred to travel widely to see for herself what the real story was. Having grown up in the midst of the Great Depression, she believed that people were the ultimate indicator and that governments were the penultimate contrarian influence.

If she were still alive today, I think she'd encourage us to take a good hard look in the proverbial "mirror" especially with regard to the looming fiscal cliff making headlines the world over.

And I don't think she'd waste any time with the doom, gloom and boom crowd either.

She was always on the hunt for opportunity when everyone else was running from chaos. Thanks to her, it's a habit that remains firmly ingrained in me today.

Not One but Three Fiscal Cliffs

And that brings me back to the "fiscal cliff."

In my mind, this is a misnomer. There isn't really a singular fiscal cliff . As I explained earlier this summer to Sheryl Nance of Forbes there are actually three.

  • The massive adjustments headed our way as tax and spending cuts expire and come into effect beginning in 2013. You may know it as taxmegeddon.
  • The debt debacle and the near complete lack of any sort of credible financial consolidation plan that will affect everything from interest rates to collateral requirements and the US credit rating – again.
  • And politicians who simply don't understand that issues 1 and 2 are already dramatically impacting the economy long before the theoretical limits of spending come into play. Profits are declining and 61% of companies that have reported through Monday October 22nd have failed to meet expectations. Hiring is slowing and top line revenue is increasingly hard to come by.

Together, they constitute a massive threat to the U.S. economy that could push our beleaguered "recovery" to the breaking point. (And I use all the sarcasm I can muster with that because our recovery isn't anything close to what's needed.)

Many believe this is a moot point because Congress will get down to business in November after the Presidential Election takes place. The hope is that some sort of budget agreement will be reached and that the US economy will then be positioned for stronger growth in 2013.

Yeah and I suppose the tooth fairy will show up, too.

The IMF and CBO are both on record noting that the estimated $400 – $600 billion in impacts that will result from the combination of spending cuts and tax hikes could derail economic growth while causing a sharp contraction.

Even Helicopter Ben himself has warned of dire consequences. More importantly, dozens of reformed economists, bankers, CEOs and small business owners agree.

Any breakdown in the political infrastructure would represent a catastrophic political, social and economic failure that places literally every level of our economy at risk of further disaster.

Under these conditons, everything from our credit rating to international trading relationships faces mortal risk.

Europe could also come unglued if our banking system goes south. I know many European leaders like to believe they are independent but the reality of an internationally linked fractional banking system renders that notion pure folly in this instance.

Is There a U.S. Dollar Rally Brewing?

Conventional wisdom, under the circumstances, is that the U.S. dollar will become even more worthless than it is now.

I don't think so. In fact, I expect the U.S. dollar to strengthen significantly. Here's why…

When the shooting started in the Middle East, bankers came running. When the fiscal crisis began, the dollar ran some more. When the European crisis broke, people couldn't get enough dollars.

And as China had slowed, the dollar has enjoyed newfound stability. Even during last year's Congressional debt ceiling donnybrook for example, the dollar outperformed the Euro as investors sought refuge.

History shows that bankers from Shanghai to Milan and all points in between run to the dollar when global instability raises its ugly head and the fiscal cliff or cliffs would certainly constitute instability.

And that reminds me of something else Mimi used to allude to all the time.

"Keith," she would say as we enjoyed some piping hot pastrami sandwiches and cold beer together (one of her favorites), "much of the world may hate our guts, but when the fur starts flying they love our money."

These days they have to. For the moment, there's literally no alternative capable of absorbing the needed liquidity. That alone is probably worth another 10%-15% of upside for the U.S. dollar.

As for the alternatives, the euro itself is in question and at risk of fracture and the yuan isn't deep enough yet.

As the dollar goes higher, US-based stocks, bonds and preferreds should go along for the ride if not in terms of absolute gains, then in terms of stability. Investors factoring in dividends and bond payments, even at historically low interest rates could enjoy their own recovery.

So, too, could the Chinese who sit on an estimated $3.2 trillion in trade reserves and an estimated $1.169 trillion of which is held in U.S. dollar denominated debt.

Many people don't want to hear that. But understanding how a stronger U.S. dollar would affect the markets may lead to some the most profitable decisions they've made since this crisis began.

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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 High Velocity Profits, 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

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  1. Dimi Chakalov | October 31, 2012

    When "the fur starts flying", Keith believes the dollar will go higher in terms of US-based stocks and bonds, "if not in terms of absolute gains, then in terms of stability", which is exactly the case of 'the last straw that breaks the camel's back',

    It's like jumping from higher cliff, only there is no lake underneath.

    D. Chakalov

  2. D Moore | October 31, 2012

    I would like to see article explaining the relationship between the dollar and the market ( equities and commodities).
    PS. with plenty of charts Please.
    Thank you

  3. Leon | October 31, 2012

    History shows that bankers from Shanghai to Milan and all points in between run to the dollar when global instability raises its ugly head and the fiscal cliff or cliffs would certainly constitute instability.


  4. Allen Ligon | October 31, 2012

    I agree with the Dollar strengthening in the event that we hit the Fiscal Cliff without a Grand Bargain being worked out. Two other factors to consider that will also continue to support a stronger US Dollar:
    1) World Trade is done increasingly in US Dollars (When Brazil sells thier agricultural products they sell in Dollars; and, Most Oil contracts globally are done in Dollars …just a couple of examples) …so as global trade expands so does the demand for Dollars needed to trade with. The "dirty secret" here is we benefit from the strong global demand for dollars as the dollar then buys cheaper imported products which Americans enjoy (even though we really did not break a sweat to earn that additional buying power). World trade will continue to grow with or without the USA in a slowdown or slow growth mode caused by the fiscal cliff.
    2) A lot of people support slashing US goverment spending and even increasing taxes (less excited about but willing to tolerate) to see a lower deficit. Many people inside and outside the USA will see this as a recognition of our largest single trouble and a step in the right direction and this will strongly support the US Dollar.

    By the way …excellent article ….keep up the good work.

    Allen Ligon
    Global Commerce Associates
    Atlanta, GA

  5. Charles | October 31, 2012

    Every dollar you had when Obama became president is now worth 60 cents. If his current fiscal policies remian in place those original dollars will be worth 4 cents at end of next term 9the change he promised).

    Every time he borrows or prints another dollar yours goes down in value. It is decreasing 1% (one cent) per month or 12% annualized. When the government takes money from you it is called a tax. This is Obama's hidden tax on all of us.

  6. H. Craig Bradley | October 31, 2012


    If reelected, President Obama will remain an impediment to the necessary arrangements with Congress to effect serious budget deficit reductions. Instead, I would expect superficial proposals that are labeled as some kind of "Grand Bargain". As with Europe, each new plan to deal with the PIGS is initially well received by the markets. Futher investigation and subsequent developments cause disappointments and the markets then go down. Our deficit reduction story is likely to be quite similar, as well.

  7. P Dueweke | October 31, 2012

    The dollar looks good because everything else looks worse. That is true in the short run, but when the BRICS get their act together, and when they think the time is right to destroy the dollar, we are toast. Admittedly, the short run has had a surprisingly long engagement.

    • caloot | November 9, 2012

      I couldnt agree more. The Dollar rising? That is the biggest joke I have heard in the last year at least. This guy is inept. Probably thought the stock market would rise after obama reelection too. The leader of China had just said that incomes need to double in China. The only way that happens is to unhitch from the dollar. When that happens, the Chinese will no longer need those American debt produced exports. So what if they lose a trillion in treasuries. They are worthless anyway. 1.6 percent yield, and completely and utterly overpriced. America is bankrupt at 1.6, what happens at 4%? This conventional wisdom crap is beginning to make me sick.

  8. Raginbull | November 9, 2012

    I would like to print my own money.

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