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Five with Fitz: What to Expect If We Go Over the Fiscal Cliff

I'm on the road this week in Las Vegas and Los Angeles and receiving lots of great questions as usual from your fellow Money Morning subscribers.

Here's a few that really caught my attention. Not surprisingly, one of the biggies deals with the fiscal cliff.

Q – What happens if we go over the "fiscal cliff"…really? – Jerry S.

A – Nobody truly knows Jerry. However, here are five things I expect to happen as a result.

First, the U.S. goes back into recession. The CBO (Congressional Budget Office) suggests there will a 0.5% contraction if the government can't stop both the debt and the spending cuts. That's a huge drop from the 2% growth it presently expects.

I think both numbers are complete fantasy, incidentally. The government missed this crisis in formation and they are flying blind now. How on earth they can predict 2% growth right now defies any sort of logic whatsoever. Then again, we are talking about the federal government. Sigh.

If we go over the fiscal cliff, I'm expecting as much as a full 1% contraction. And growth under the circumstances will hardly be normal, let alone 2% for years to come. The fiscal cliff and our politicians' unwillingness to do anything about it other than kick the can down the road so far makes it clear to me that America is going to struggle with the legacy of decades of bad fiscal policy for years to come — just like Japan has for more than two decades.

Second, I think companies are simply going to vote with their wallets under the circumstances. Many are already hoarding dollars and announcing changes to operations following the election, but now they're going to cut back further on capital spending.

At the same time, the fiscal cliff will reduce foreign direct investment into the U.S. because many companies will shift their attention to other markets where there is more certainty.

Third, the unemployment rate will rise, housing markets will reverse course, and the Fed will engage in yet more meddling and more money printing. It will no doubt be well intentioned, but simply digs America further into a hole.

Fourth, the government will continue to raise taxes on the "rich," only they will broaden the bag so as to sweep in much of Middle America. People who are content to think this strategy applies only to the "super rich" haven't yet keyed in on how broad this net will actually be. I think they're in for a rude awakening.

As part of this process, I expect Congress to make a grab for retirement assets, and attempt to force those who want to save for their future to save for Washington's future as a part of some sort of mandated savings requirement. Chances are they will engage in some tax reform when it comes to municipal bonds and other income- oriented investments, too.

Fifth, the markets will falter and perhaps even correct by 20%, as Marc Faber recently suggested on CNBC. No doubt that's going to stink on a variety of fronts. But a retracement will also put a slew of great companies on sale and create unbelievable opportunities in everything from gold, inverse funds, certain bonds, and especially the "glocal" stocks we prefer.

I don't share Washington's optimism that things will magically get fixed, which is why we've been preparing Money Morning readers and those of our sister service, The Money Map Report, ahead of time for this contingency. As part of that, we've been selling into strength, picking up metals and tightening up our trailing stops.

Having bought into the markets off the 2009 lows, I am not anxious to see subscribers lose the gains many are sitting on if they have followed along with our recommendations.

Now's not the time to take anything for granted, especially when it comes to your money.

Q – I'm worried that the short sellers who were so problematic a few years ago will reappear and tank the markets. But I don't hear a lot about it right now…why? – John S.

(Editor's Note: John's referring to the naked short sellers who made headlines early on in the financial crisis because of the amount of money they made betting that the prices of stocks (and other investments) would go down.)

A – Super question. There are a few factors at work. First, coming off the March 2009 lows, it's been very hard for short sellers to establish positions because hard rallies don't tend to create a lot of opportunities. Second, much of the short selling was conducted by institutional traders working for big banks, in particular. They're under the microscope right now so it's not likely they are going to override their short rules again without incurring the wrath of an understandably angry public and deeply embarrassed regulators. Third, the SEC has tightened up the borrowing requirements for short sellers so it's no longer possible for more than one party to borrow the same shares of stock needed to effect the short. This reduces the number of shares available to short – in other words, there simply isn't as much fuel available for the bonfire …

Q – How do you tell when institutions are getting cold feet and hedging? – Rhonda P.

A – Thanks for asking, Rhonda. Admittedly, this is more of an art than a science but here's what I look for.

First, volume will generally begin to fall off. When coupled with prices that are still rising, it suggests the big money is distributing their shares to late comers. Typically you will see a rash of headlines "blossom" around the same time, or analyst reports touting yet more gains to ramp it up as a means of inviting the last people to the party before the lights are turned out. That's why I frequently advocate selling into strength…because I'd rather be with "em than be left holding the bag they want to hand to unsuspecting buyers.

Second, looking at time and sales information, particularly for options on the big indexes, is a favorite of mine. When I see a "bloom" of activity that's headed in the wrong direction from the major averages, for example, I know that something's up…or about to be down.

Third, I look to the Commitment of Traders Report, or COT for short. Put out as a weekly report every Tuesday by the CFTC, it shows net long and net short positions for commercial and non-commercial traders. What makes this report interesting is that it frequently shows when traders shift from one side of the fence to the other, many times in advance of bigger market shifts.

Q – Loved your recent comments in the Wall Street Journal article on collectibles; I'm also an avid motorcyclist. I'm wondering if now's the time to diversify into other collectibles too? – Randy Z.

A – Thanks, Randy. One of these days we're going to have to put together a Money Morning ride. I hope you'll join in when we do.

As for collectibles, there's no doubt they can provide significant portfolio diversification. However, there's an important caveat – when you want to sell, collectibles are only worth what a buyer offers.

Sometimes that's a lot, but sometimes that's not. Collectibles pricing is closely related to overall economic conditions and the specificity of the collectible. The market for Picasso is very different, for example, than the market for early Chinese bronzes.

In closing, please keep those great questions coming. I enjoy receiving them and love answering them even more. You can send them to:

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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. Pamela Re | November 16, 2012

    Dear Money Morning:
    The "Fiscal Cliff" is looming ahead, the probability of tax hikes for the "rich" is high
    and will cause more selling. Daily there is news about Billionaires selling all stocks
    and buying metals. Do you advise that people sell their stocks even if in a loss position?
    None of my stocks are in the US markets and half are in a loss position including
    SIE:GR, SU:CN, PPL:CN and PCE:CN. The others are either at breakeven or close.

    Today I just sold KPN:NV at a 50% loss of principal. My question is:
    should I sell the others and sustain more losses or hold and watch them decline further in
    the short-term with a potential to appreciate at some time in the future? I would loose
    much more money if I sell now. Since I don't trade in options, warrants and futures
    my ability to quickly gain back any losses is lower than many others who are more
    knowledgeable and experienced. I do not now hold anything in US markets.

    What do you advise?


  2. Raymond Sigwalt | November 16, 2012

    When will the talking heads admit to the real economic crisis in our country. It is the trade deficit. In the last 40 years we have exported 11,118,693,000,000 dollars. We cannot continue to be a non productive country. The thought that a service based economy is good and sustainable is not very well thought out. I believe it was Winston Churchill that said that you cannot survive ironing each others pants.

    • rickers | November 16, 2012

      You my friend, are right on the money!! This whole emanates from our continually buying imports from countries, both friendly and unfriendly to us, with no thought given to the ramifications of being self sustaining. All that money flowing overseas has served only one purpose and that is to devalue the dollar and weaken our economy to where it is now, on the precipice of a economic disaster the likes of which the world has never seen. I hate to sound gloom and doom but I honestly feel we are past the point of no return; the politicians and this administration are fiddling while the spark has already lit the fuse.. This is not good..

    • Ed Invests | November 18, 2012

      Somehow, someone, somewhere, will stop thinking in a negative fashion. Negative thinking takes you down and positive thinking makes you think of other possibilities. First, our oil reserves are slowly digging into the trade deficit, and are forecast to great growth. Second, we are finally seeing a return to manufacturing in the USA. Third, the world is a far different place than in Churchill's time. The internet and the connection to the rest of the world is beyond what he could have possibly conceived. All companies are now global in revenue, and it has it's good and bad sides. I love history, but it has to be taken with context to current situations. Japan has been a trading country for centuries, but finds itself in deep trouble today. I guess it goes back a lot more to the distant past. Adapt or perish. I think we, as a country have a greater ability to adapt than virtually any other, due to our natural resources and people. I am disappointed in the educational abyss, but find great hope in the ones that continue to excel beyound expectations. A day rarely goes by that I do not read about another breakthrough in areas that were not even concieved in my youth. One last question. Do you know the trade deficit by sector? I don't, but suspect oil was at the top and a great contributor, and we are doing, and will do, the right things in reducing our need of it, whether we produce it or not. Nothing remains static.

  3. Ram | November 16, 2012

    Suppliers seek other markets? There is no other market as large,as sophisticated, as the USA.

    • rickers | November 16, 2012

      Yes, you are right, but why put resources and effort into marketing goods and services into a country whose populace, 50% is on the take from the federal entitlements programs out there.. This leaves very little money to buy one goods and services.. We have to get back to basics.. What does this country make and sell anymore that others in the world do not, or some other things that no one else can make as good with intrinsic value attached. Therein lies the problem..

  4. Edna | November 16, 2012

    They need to go over the cliff and dont find their way back, they are the ones that voted for that sorry lying president obama back in office after he was a lier, good for nothing president the first 4 years. they need to be in the fields grazing just like the cows.

    • Edouard D'Orange | November 16, 2012

      Edna, could you please stop holding back and tell us how you really feel? Voters (if there wasn't fraud and a sham election, which I suspect there was) voted for more freebies and giveaways that the Democrats promised. Of course, there is no way to pay for any of these handouts except by borrowing more money and printing money.

    • rickers | November 16, 2012

      You are so tight! Social issues and freebies dominated this election, and that is why I feel we are doomed for economic upheaval like this country has never seen before..
      As seen in the elections, people voted for what was perceived to be good for their own personal gain, not what was good for the country..
      The lack of the populace that has a will to work and create goods and services in lieu of entitlements spells disaster for the USA. Oh the country will survive, but in some other form..
      The scariest scenario is one where when markets collapse and their is a drying up of the well, so to speak, we have vast civil unrest and our "fearless leader" proclaims martial law..
      That is the scariest scenario I can think of I certainly hope it does not come to that, but it is like 5 to Midnite. Why don't people see the handwriting on the wall?

    • Nan McConnochie | November 16, 2012

      Edna then you could have a fart tax.!!!!

  5. mike schuh | November 16, 2012

    There is no way the middle class can pay for all this dept. Its better to go with what Obama wants to do than cut out programs that have been paid fore in payroll deduction. I call it fleesing of the middle class. The republicans call it intidelments. It was the big corperations that elected to go to china and cheap labor—-there the ones that
    are turning there backs to the american people—-personally i beleive in equal trade not free trade—–its time for protectionism.

    • Robert in Canada | November 18, 2012

      Mike, please look up the cause of the great depression of the 1920's and 30's.

      It was caused primarily by trade protectionism.

      Unions and other un-informed radicals seem to think it's the way to go, even though it has always failed where ever it has been tried.

  6. Jeffrey Schaefer | November 16, 2012

    This fiscal cliff was created by our President, Senate and House when they agreed on a solution to adding onto our national debit earlier this year. Now they are all going back on their action and want to kick the can down the road again and not solve the problem but let the problem get bigger and leave us the tax payer to pay for them not doing their job. This problem will never be solved until the American people hold the President, Senate and House to keep their word and to do what they tell us what they are going to do and not change their mind when it comes time to pay the price. This present generation is failing our children and grand children by not solving our debt problem our selves but putting it onto them to pay for our excessive life style and greed.

    • rickers | November 16, 2012

      How can you hold the President & Congress accountable when the people are so dumb that they vote the same idiots back into office?
      I am so frustrated by all of this mess and I feel like we will all suffer because that 50% that drinks the KoolAid, and the other 5% who bought into the KoolAid Mix have catapulted this country onto the brink of an economic disaster the like we have never seen..
      How can the FED just keep printing money and not expect inflationary pressure to happen?

      These so called geniuses are never held accountable and we the people get stuck. Look at DODD & FRANK.

  7. Tom | November 16, 2012

    Concerning "What happens if we go over the fiscal cliff", it is important to remember to email your congressperson and make your concerns known as well as your requested action. It takes a couple of minutes to compose the email (no need to be verbose….thier staff simply scans, catergorizes and tallies the letters) and it takes 1 minute to look up the email address of your congressperson.

    This 5 minute investment will do more for you than worrying will do.

    Take action where you can….not just in your portfolio, but also with your congressperson.

  8. BILL | November 16, 2012


    • Joseph | November 16, 2012

      Bill if you have no positive contribution to this article, then shut your big mouth. People like you are the reason this country is going down drain.

  9. Dennis K. Miller | November 16, 2012

    I do not understand this over-reaction to the fiscal cliff. Is it not what we need to do to correct the situation that we (USA) are in. I mean can the government that agreed to this plan 2 years ago
    come up with a better plan. They had two years to do that and We the People voted them back in for at least two more years! Will not Mr. Market realize that the USA is finally getting its future assets in order and like what it sees?

  10. Steve | November 16, 2012

    Speaking of metals, I recently looked back over the historical prices of gold, silver and platinum. Prices were fairly stable from 1982-1999. I picked 1994 and as my starting point. The price of silver is up 600%. Gold is up over 500%, but platinum is up less than 400%. Does this mean silver is overvalued and platinum is undervalued? Or is there a greater demand vs. supply for silver now with the electronics boom? Alternatively, is it that silver is an easy place to put your money in this unknown economy? I would suggest it is all 3. Platinum is being recycled from catalytic converters and silver is being thrown away when the electronics fail. I suspect that the price of all 3 metals still have room to rise.

  11. Bill Drake | November 16, 2012

    Why do you and so many others insist on placing their money in stocks ?? The stock exchanges are the BIGGEST "high-roller" games on Earth. There is not ONE company within it all that, if you tore it down and sold the individual parts, would be worth the outstanding value of its stocks ! A dumbass buys a stock hoping that an even DUMBER dumbass will be willing to pay even more for it. When the bubble bursts and suckers dry up, the stock market cries " oh woe is us", and the Fed steps and bails their nuts outta the fire ……WITH TAX-PAYER DOLLARS. Money from the "little people" , as the CEO of BP called most of us. The same little people that built America from the wilderness up. The same people that don't have enough discretionary money left over after paying their bills to buy even ONE share of overvalued stock. So, KNOCK IT OFF. Americas problems will be healed from within, not by Federal intervention. Oh yeah, if I hear that most recent catch phrase " JOB-CREATORS", one more time Ima gonna puke. If those billionaires are truly such much-to-be ass-kissed job creators, WHERE ARE THE JOBS. I rest my case,, GET REAL.

  12. nicole | November 16, 2012

    The blame game won't get you anywhere. The fault is on all of us not just those who voted wrong.
    We long ago left true America and have been playing a game of give me give me give me…..why not ask what you can give your country instead of what your country can give to you?
    The research of those who thrived during the great depression only proves that this is a time where change can happen and those who have nothing can have something. Research and work will Carry those willing to continue to make money and give opportunity that was not available before.
    History has proven over and over again that all empires fall! Now is not the time to stand around and wonder how this could have happened. Now is the time to pull your belt tight watch and save save save….. maybe we can't stop it from happening but we can be those who gain from it.

  13. john | November 16, 2012

    I think the government is going to confiscate everybody's gold like they did in the thirties along with their 401k The best thing to have is cash if it's worth any thing

    • Ronald Sarson | November 16, 2012

      No, the best thing is to have gold & silver safely deposited overseas with a workable plan to have access to it, even if that means leaving the USA.

    • BHOLMES1 | December 4, 2012

      Hi John …

      Thoughtful comment. Thanks for posting.

      Don't know if you subscribe to Private Briefing as well as reading MM. But this past Monday I interviewed a respected metals guy about that very topic. I get that very question more frequently than you could ever believe.

      Anyway, if you are a PB subscriber, allow me to direct you to the Monday (Dec. 3) issue of Private Briefing. I thought you'd find that of interest.

      Hope you are well. Thanks again.

      Respectfully yours

      William Patalon III
      Executive Editor
      Money Morning & Private Briefing

  14. John Repar | November 16, 2012

    I don't believe that there is a Fiscal Cliff ahead if congress simply does nothing. We have gone through a rough 4 years as our markets have adjusted to the fact that they were inflated by congressional action that was designed to do just that. A feel good situation that met reality. We all liked to brag about the value our homes and how rich we were becoming ignored the fact that they are worth only what we get net after we sell them.

    I don't remember being euphoric when the tax cuts took place during the DotComm bubble. The increases only take us back to the tax levels at the end of Bill Clintons presidency. To most people this will be be a 90 day adjustment. I do believe the economy will be level and a year from now we will all be looking forward to Christmas.

    Most of the jobs lost in large companies are gone. Small business growth is the place to look for employment. American people don't like living the life we have been over the last 4 years and I believe have started to open up their wallets. They will continue to do so if the government and press will stop selling us on how bad things are and that they can fix it.

  15. Elaine Connor | November 16, 2012


  16. deane gilmour | November 16, 2012

    1- businesses will start closing their doors by the hundreds and then thousands. As a result unemployment will reach at least 12% by 2014. there is another round of foreclosures that will probably reach the rates in 2008-11. As result apartment and rental homes rates will increase by at least 25% and possibily as much as 50%. as a result there will be an increase of 100% homeless, families will increase by at least 10% and those having family will have as many as few as 7 and up persons living in 1200 sq ft 3 bdrm 2 bath homes. Fuel for transportation and heating will increase in cost due to the increase of other goods and higher taxes and federal fees such as the runoff fees for rainwater. Insurance will increase by a minimum of 24% due to the destruction of Sandy. Social Security will be taxed even for those making less than $15k in benefits per year. Those senior citizens without private health insurance will have their Social Security reduced without reason to cover the higher govt mandated cost and may put many on total dole if they are lucky enough to have govt housing in the area where they live. Govt housing will be so crowded that singles will not be allowed to have a single unit but be doubled up by the government/m, the mtg debacle started by Schumer, Frank, his boyfriend at Freddie Mac, and Sen Obama along with others in the forced loan attempt to put everyone in homes will further deteriate home values, and those who have kept their homes will find them worth less than 5% of the amount they paid into and for them over the period of their mtg. Mtg companies will be fewer and fewer due to the losses on short sales and foreclosures and the inability to collect from theose foreclosed on with no funds at all. The wealthy such as Buffet, and the entire entertainment media will soon begin leaving the country as mnay have already done such as Cloney and takng all the wealth they can before the Fed closes up such attempts to "run". Citizenship for those persons will start dropping as soon as they can leave the country since the USA is the only nation whose citizenship you can NOT renounce as long as you are within its or its territories borders. "1984" is reality but only 30 years late. Barry aka Barack, must have studied the "Federalist Papers" as well as the radical Koran as an Islamic in his adopted Indonesia. For within that collection of letters and essays is stated again and again the fear of what could destroy the Republic and our founders knew it but prayed that freedom,liberty, and the willingness to accept the responsibility of those would keep this nation alive.

    • Steve | November 20, 2012

      1200 sq feet and 2 baths for 7 people? That would be a step up for me and my neighbors. Gilmore, you are an optimist!

  17. Jim | November 16, 2012

    Im beginning to agree with John Rebar, and his ilk. Im not as worried about the
    "Cliff" as the catastrophe mongers of the press and some of the politicians. What is so
    catastrophic if Congress does nothing, and the tax cuts which were enacted by W Bush
    are simply allowed to expire, and some of gargantuan spending programs enacted by
    Obama are cut back?

    I think we need to backtrack a bit!!! Bill Clinton had many flaws, but he had been a
    governor, had to balance a budget, and learned from Greenspan about the need to sychronize fiscal and monetary policy. Large deficits and the need to finance them by issuing Treasury Bills (interest bearing debt) conflict with Monetary Policy which involves "Open Market Operations" (ie the Feds purchase of debt to manipulate long term interest rates, or short). Clintons policy
    worked because he narrowed the deficit, which took preasure off the Fed (monetary

    Somehow, weeve got to begin to get onto a glide path to lower the gap between
    government receipts (taxes), and government expenditure, the Deficit. We have
    to start this process Now!!! Not a year from Now!!!! If going "Over the Cliff" thru
    congressional innaction achieves that goal, and we suffer some pain Now, isn't that
    better than continuing the suffering we are going thru!!!! No Pain, No Gain. Brazil went
    thru this in the 1980's, Argentina went thru it painfully, and Japan went thru
    this and is still here!!!! If this means extending Unemployment benefits for 2 years
    maybe the Republicans should consider this a small price to pay!!!!!!!!!!

  18. Aussie Brian | November 18, 2012

    Gday Guys, as an interested outsider looking on and having ties with your country through my extended family in Illinois, I do hope you can get your S*it together and quickly. We need a strong and stable USA in the world and even though you have your faults, as do we all, you are the best option to lead the world for this century. If I can say though, after having worked with many American men and women over the past 10 years in educational reform in the Middle East, the rot has been setting in with your country for a long time. Greed, neurotic behavior, condescension and a rather arrogant attitude has worn away a lot of good feeling that the world feels towards your country. I mean you make up 5% of the worlds population but consume 30% of the resources..something was wrong with that, it couldn't go on forever and now the chickens are coming home to roost and they are s*itting on you from their perch. Why don't you go back to the ideals and hard work ethic and just a humbleness that as a country and individuals you have forgotten. The things that we all loved about you as a 'lets do it' society has been replaced by a snide, blaming and hypocritical society. Can the REAL Americans come back? We need you because saving the world on our own is beyond us Aussies..:)

  19. Bernie B | November 19, 2012

    My comment is to Keith's reply near the top on short selling and volume. Short sellers can cooperate and get around size limits, and yo just know they will. And what is "volume" when so many trades are done off the visible exchanges and occur invisible on the "dark" ones?

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