Start the conversation
Many investors believe that a fiscal cliff "dive" is inevitable.
It's hard to disagree.
Our politicians have refused to do anything but kick the can down the road to date.
The blame game started mere days after the election and it's highly unlikely that we'll see anything other than more foolishness out of Washington.
So what do you do about it?
Simple: First, you need to protect your savings from getting destroyed by the fiscal insanity. Second, you should look to reposition your portfolio with the goal of making a hefty profit. We call this one-two punch... Survive & Conquer the Fiscal Cliff.
In a minute we're going to show you exactly how to do both...
But first, here's why you need to pay very close attention, even if a miracle happens and Washington comes to an agreement.
The U.S. Economy Will Suffer Whether
There's A Fiscal Cliff Solution Or Not
You see, for all the talk about how Congress needs to avoid the fiscal cliff, few have pointed out that the U.S. economy will suffer regardless.
The only question is the timing.
If Congress fails to act and America goes over the fiscal cliff on Jan. 1, 2013, the U.S. economy will, as many have noted, quickly plunge into the abyss.
Editor's Note: A group of highly renowned economists believes another economic crisis is about to hit... and it's 100 times worse than the Fiscal Cliff. Details here.
But if Congress does somehow agree to avert all or most of the impact of the fiscal cliff, it simply postpones the pain for a few months or years.
And if Congress elects to postpone the fiscal cliff indefinitely, choosing to continue the federal government's massive deficit spending in perpetuity, the federal debt will weigh more and more heavily on U.S. economic growth as the years go on.
Let me explain...
How Fiscal Cliff 2013 Affects U.S. Economy
The fiscal cliff is political shorthand for the combination of spending cuts and tax increases scheduled to hit Jan. 1, 2013. It's the result of the expiration of the President Bush-era tax cuts combined with $1.2 trillion in automatic reductions in federal spending made last summer as part of the deal to raise the debt ceiling.
The consequences of going over the fiscal cliff or delaying it can be found in the latest report on the matter from the Congressional Budget Office (CBO), "Economic Effects of Policies Contributing to Fiscal Tightening in 2013."
And this latest report, which is different than the previous CBO projections, actually includes a clue as to how Congress could decide to deal with the fiscal cliff before the end of the year...
Editor's Note: Is it too late to avoid an economic catastrophe? This controversial video investigation that went viral recently will raise the hairs on your neck.
That's because the recent report was done at the request of Senate Finance Committee Chairman Max Baucus, D-MT, specifically to study what would happen if Congress pushed the fiscal cliff two years into the future.
The CBO has previously offered stark predictions about the fiscal cliff impact on GDP (gross domestic product) if Congress does nothing.
The CBO, in previous reports, said if the U.S. economy "fell off" the fiscal cliff, GDP would shrink by 1.3% in the first half of 2013 and 0.5% for the full year, pushing the country back into recession. Unemployment would again start rising, reaching 9.1% by the end of 2013.
But as bad as things would be for much of 2013, the U.S. economy would begin recovering before the year was over.
In the "fall off" scenario, GDP turns the corner in the second half of 2013, rising 2.3%. Then, in 2014, GDP jumps 5%, followed by a startling 6.4% increase in 2015.
And the country's debt burden would start to fall from 70% of GDP now to 61% in 2022 and 53% in 2037.
So in exchange for short-term financial pain the U.S. economy would gain a long-term benefit by finally getting the government's deficit spending under control.
But as the current report shows, a two-year extension of current policies will also deliver an economic blow, just a delayed one.
U.S. Economy at Risk Regardless
Given the panicky predictions for what awaits America if it goes off the fiscal cliff, it's no wonder that avoiding it is considered the most desirable option.
But in the long term, avoiding the fiscal cliff is akin to avoiding the dentist when you have a toothache. The pain will just keep getting worse.
Or as the CBO puts it: "Debt cannot continually increase as a share of the economy: Policy changes would be required at some point. The longer the necessary adjustments in policies were delayed, and the more that debt increased, the greater would be the negative consequences."
Extending current policies would indeed push GDP up 5.3% in the first half of 2013, which sure sounds a lot better than another recession.
But the initial growth spurred by extending current policies starts to peter out after six months. By the second half of 2013, the CBO says GDP would slow to 3.4%. From there, slower growth would continue through 2016.
Most troubling, however, is what happens to the federal debt - currently over $16 trillion and accumulating at a rate of over $1trillion per year.
Avoiding the fiscal cliff ensures that federal debt held by the public will rise to more than 90% of GDP by 2022, pass its historical high of 109% by 2027 and soar to nearly 200% by 2037.
Countries with public debt levels over 100% - like Greece (165%), Italy (120%) and Japan (205%) - tend to have major economic problems.
In fact, the CBO predicts the ballooning federal debt will start eating away at U.S. economic growth at a faster and faster rate - a 1.8% reduction in GDP by 2027 and a 6.7% reduction by 2037.
"Large budget deficits would reduce national savings, thereby curtailing investment in productive capital and diminishing future output and income," the CBO report said.
These CBO projections leave Congress with a greater dilemma than many realize. Lawmakers need to do more than just avoid the fiscal cliff - they need to deal with it in a way that won't plunge the U.S. economy in to recession now, and won't stifle growth later.
Ideally, Congress would cobble together a "grand bargain" that strikes just the right balance, but given the deep partisan divide on Capitol Hill it's more likely they'll kick most of the problem down the road - again.
So what do you do about it?
Here are Five Survival Strategies... followed by Four Conquer Opportunities that will keep your portfolio protected ... and even give you a chance to turn this mess into your favor.
Fiscal Cliff Survival Strategy # 1
Stress Test Yourself
Never mind the big banks or Wall Street's hooligans, take a good hard look in the mirror.
Many investors are completely unprepared for the psychological impact of our nation going over the edge. And, you don't want to be one of "em.
Read the fine print on your brokerage statements. Imagine what happens if the markets drop 50%. Will you cower in fear or go on the offensive? Can your portfolio handle a stock market plunge or will you be left grasping at straws when the smoke clears?
Focus any discomfort you feel into something productive like realigning your expectations, your portfolio and your investing tactics so you can capitalize on the opportunities a fiscal cliff dive will create.
Fiscal Cliff Survival Strategy # 2
Under What Conditions Will You Sell?
Many people assume that we will wake up one day and somebody will announce that America's gone over the fiscal cliff.
I don't think that's the case. The markets are already adjusting to that possibility and, while panic hasn't set in, it's only a matter of time if our leaders can't get their act together.
When that happens, the last place you want to be is standing on the sidelines with your thumb in some unmentionable part of your body wondering what to do.
Decide now - ahead of time - under what conditions you are going to sell and why.
Use Trailing Stops
This sounds pretty self-explanatory but you'd be amazed at how many people I talk with every year that don't use them, despite the fact that most brokerages and online trading platforms have these features built in and available for free.
Trailing stops, in case you are not familiar with them, are essentially price targets that work in reverse.
They are typically calculated as a percentage of purchase price. For instance, a 25% trailing stop on Apple at $657.41 is $493.06. If the stock dropped to $493.06, the order would execute and carry you out of the trade.
Variations include specific dollar-based stop losses, calendar stops and contingency orders - all of which typically rise in lock step as the price of your investment rises.
What I like about trailing stops is that they offer an unemotional, unbiased exit path when any investment begins to move against you. But that's the catch. You have to give up some ground before you're carried out of the trade.
As is the case with any investment strategy, there are people who don't like trailing stops because they get bounced out of trades that seem to immediately turn around and head higher without them.
I can't say I blame them. Floor traders, hyperactive day traders and quants with computers that would make NASA envious love to "shake the monkeys" from the trees and "run the stops." Both are euphemisms for deliberate actions intended to exploit the protective actions of others for gain.
It doesn't bother me most of the time because I have an investor's mentality. Therefore the daily volatility associated with this kind of gamesmanship is just noise and hitting the occasional stop is just part of the game.
If I am day trading, that's another matter entirely - and a subject for another time because setting trailing stops in a day-trading environment is a discipline all its own.
Your decisions can be part of some elaborate plan or as simple as a 25% trailing stop. It really doesn't matter. That you are prepared ahead of time does.
This strikes some people as defeatist. That's nonsense. No investor has to suffer the ravages of a bear market if they've prepared ahead of time.
Fiscal Cliss Survival Strategy # 3
Not All Risks Are Worth The Investment
Wall Street's lawyers love to point out that all investments involve risk. I agree. But that's only half the story. What they don't tell you is that not all risks are worth the investment.
Take the difference between large "glocal" companies and small caps for example. The former are generally characterized by globally recognizable brands, have fortress like balance sheets and have long histories of raising dividends over time. The latter may be new, have inexperienced management or unproven sales channels. Most pay no income whatsoever.
Do you really want to risk your hard earned money with anything less than the stability and experience needed to survive a global financial upheaval?
That's not to say there isn't a place for small cap stocks in your portfolio at the moment. There is...especially when you can identify a specific catalyst for future profitability like a patent or innovative game changing technology.
My favorite small caps right now are related to medical, bio, and defense tech. All three segments are game changers that quite literally could affect millions of people and produce some outrageous returns, too.
Just keep the risks in line with the rewards.
Fiscal Cliff Survival Strategy # 4
Make Consistency Your Mantra
Despite unbelievably challenging fundamentals and more than 12 years of disjointed markets, many investors remain hypnotized by the promise of buying something cheap and having it turn into the next Google, Apple or Amazon.
This baffles me but I can understand their thinking. You've probably heard as many stories as I have over the years of people who have "made it big" buying some obscure company that turned into a gold mine. The greed gland is pretty powerful.
Just remember that huge profits come with huge risks. What people don't talk about is the fact that many of the most famous traders of our time - guys like Rogers, Soros, and Paulsen for example - work with huge amounts of capital and leverage.
Unless you are prepared to accept the risks like they do as part of a carefully disciplined overall investment plan, don't play the game. Volatility is not for the faint of heart.
For everyday investors, the real path to financial freedom and success over time is through smaller, consistent winners and making fewer mistakes.
This speaks to an investment philosophy grounded in strategies with higher probabilities of success like an emphasis on income and total returns, fortress like stocks with "glocal" capabilities, put selling, resources and disciplined risk management.
Fiscal Cliff Survival Strategy # 5
Go Bargain Hunting
With Europe entering another recession and some parts of the world flirting with a protracted slowdown that's going to be more like a managed depression, things couldn't be more uncertain.
While I don't personally like this reality any more than you do, from an investment perspective
I'm very happy to pick through the wreckage and go bargain hunting. Why?
Because history's rearview mirrors show that fear, panic, crisis and stress are all classic signs associated with opportunity. And profits.
This is particularly true for choices related energy, resources and certain kinds of technology - all of which the world needs as opposed to wants and all of which are backed by billions of dollars flowing their way whether we go over the fiscal cliff or not.
Context is the key.
Conquer The Fiscal Cliff Opportunity #1:
Buy Gold & Silver
While QE1 and QE2 clearly did little to strengthen the U.S. economy, their effects on the markets were undeniable.
Editor's Note: One simple chart shows why gold, silver and other commodities like oil could soar high than at any time in history. Go here to see it.
Since March 2009, gold is up 97%, silver is up 162%, and the Continuous Commodity Index (CCI) is up 55%.
Thanks to the Fed... and the uncertainty being created by the Fiscal Cliff, this trend has just been rebooted.
That means you should maintain exposure to inflation-sensitive assets, like precious metal favorites silver and gold. They will continue to do as well or better than they did during QE1 and QE2.
The only difference with this round of QE is that it's going to be much bigger and go on much, much longer.
So as a result of the Fed doubling its balance sheet over two years, Bank of America says they expect massive inflation, enough to see gold double as well.
They foresee gold to $3,350 an ounce. The outcome is so obvious now even a major bank can see it coming.
Conquer The Fiscal Cliff Opportunity #2:
Invest In Energy & Oil
Just like precious metals, oil prices have been on a tear since 2009, up 122%.
While oil's price rise cooled this year, new forecasts show that will not be the case for 2013.
Bank of America expects inflation to double oil prices, sending them to $190 a barrel.
But there's a lot more to oil's price rise than inflation.
Money Morning oil expert Dr. Kent Moors outlined three key reasons other than inflation that point to higher oil prices in 2013 and beyond:
- Demand continues to rise in those parts of the world most directly affecting price. Those areas are not North America or Western Europe, but are markets in which unconventional oil will not have an effect for some time.
- Oil production costs are rising. The cost of extracting a barrel of unconventional oil extracted will increase the price of the crude. Energy research experts Bernstein Research said that the average marginal cost of oil around the world today is $92 a barrel, and is set to rise because it is more expensive to lift, process, refine, and distribute these new sources of crude oil.
- Oil prices are affected by the regionalization of supply for both crude and refined oil products. As we move toward 2015 and beyond, the demand curve will dictate pricing premiums for regions where imbalances of supply are present.
Conquer The Fiscal Cliff Opportunity #3:
Invest In Dividends
Dividends represent the biggest source of returns you can get from stock investing.
Now, to a lot of people, dividends may not sound very sexy.
That's because they don't realize that 90% of the U.S. stock market's returns over the last century have come not from share appreciation, but from the cash that companies pay their shareholders.
When you think about this, it's like having the thousands of people employed by these dividend-paying companies all working to make you rich.
But you can't just go for high yield. As we enter a period of slow economic growth, you have to find companies that not only have a long history of dividend increases, but can survive a U.S. recession.
That's why Emerson Electric (NYSE: EMR) and Procter and Gamble Co. (NYSE: PG) rank among our favorite dividend stocks. They have more than half of their business overseas. Both have raised their dividends every year since 1957 and 1954, respectively. Emerson yields 3.2% and P&G 3.6%.
Another top dividend stock is Omega Healthcare Investors (NYSE: OHI). OHI is a real estate investment trust (REIT) and the company's leases have an inflation-protection clause built in, so your nominal yield - in this case 7% - is even better than it looks since the dividends tend to rise with inflation.
Conquer The Fiscal Cliff Opportunity #4:
Invest in Farmland
Legendary Wall Street trader Jim Rogers recently offered this unconventional advice: If you want to get rich, you should be investing in farmland.
"It's the farmers, the producers, who are going to be in the captain's seat when the prices go through the roof," he told The Australian Financial Review.
Over the last 100 years farmland, based on income and capital appreciation, has consistently delivered positive returns -- with only three brief periods of negative returns (1930s, 1980s, and 2008).
And as the saying goes, they just aren't making any more of it. So a severe imbalance is developing in the supply and demand of farmland.
Farmland is also an opportunity to invest in an asset class not directly correlated to stocks and bonds, and one with significantly less volatility.
Rogers believes investing in farmland is "in its third inning." In other words, there's still plenty of time to get in.
One way is to invest in agricultural futures through ETFs like the PowerShares DB Commodity Index (NYSEArca: DBC). The fund tracks an entire basket of agricultural commodities including corn, soybeans, wheat, cotton, sugar, coffee, cattle and pigs.
There's also Adecoagro S.A. (NYSE: AGRO), a Luxembourg-based company that owns significant farmland holdings in South America. It owns nearly 500,000 acres of farmland, consisting of 23 farms in Argentina, 13 farms in Brazil, and one in Uruguay.
Canadian citizens can invest in Agcapita Farmland Investment Partnership, a farmland private equity fund, with significant holdings in Saskatchewan, Alberta and Manitoba. Jim Rogers is actually an advisor to the fund, currently open to retail investors for a minimum investment of $10,000.
EDITOR'S NOTE: Click here to learn how some of the foremost experts in the world recommend you position yourself for the uncertain times ahead.