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While Americans stash extra cash to prepare for the economic effects of the looming fiscal cliff in 2013, another more immediate concern has developed: How many people will get laid off as companies brace for spending cuts and tax hikes?
The fiscal cliff will pack a double whammy to some businesses. Companies in certain tax brackets will be paying more to Uncle Sam, while some will see their government funding disappear.
The substantial fiscal cliff effect has prompted firms to rein in spending, delay projects, defer bids – and cut staff.
In fact, a recent study from Ernst & Young, the National Federation of Independent Business, the U.S. Chamber of Commerce and other business advocates revealed the fiscal cliff could slash 710,000 jobs from the already beleaguered job market.
It's already starting…
According to a Bloomberg News, companies in North America cut more than 62,000 jobs from Sept 1 through the end of October… the biggest two-month slashing of jobs since the beginning of 2010.
Further in the same time period, the computer industry cut more than 40,000 jobs… the transportation industry more than 33,000 jobs… and the insurance more than 7,000 jobs – all tremendous job loss increases over the same period in those industries last year, according to the USA Today.
Fiscal Cliff: A Painful Combo
The Ernst & Young study examined the economic effects of raising taxes on capital gains and dividends and increasing the top tax rates. The top tax rates don't just affect wealthy individuals but also some flow-through businesses that pass income to owners/investors.
If the Bush-era tax cuts expire, the top tax rate will rise to 40.9% from 35%, the top tax rate on dividends will rise to 44.7% from 15% and the rate for long-term capital gains will rise to 24.7% from 15%.
The study found that all the tax increases, including the new Obamacare taxes, would cause output to fall by 1.3% and capital stock and investments to fall by between 1.4% to 2.4%.
The result, according to the report, is a "smaller economy, fewer jobs, less investment and lower wages."
Editor's Note: An alarming new investigation shows that Social Security and Medicare are virtually bankrupt… and Washington could take a hatchet to them at any time. See the frightening graphs and proof here.
The defense industry will be hit the hardest. Lockheed Martin Corp. (NYSE: LMT) and Pratt & Whitney are going forward with plans to issue layoff notices to thousands of employees due to looming defense cuts, which total about $55 billion to go into effect in January.
And the pink slips will start arriving soon. Law requires most companies to notify their workforce at least 60 days ahead of a job cut – meaning some employees are about to find out their fate now that the election is over.
Fiscal Cliff Layoffs: More than Defense
Other businesses accustomed to receiving government money will also suffer. The amount of federal contracts divvied out last year to small firms amounted to some $91 billion.
"There's just paralysis. People aren't making long term strategic decisions. They're inching along," Craig Parisot, COO of Invertix, a McLean, VA-based firm that develops software for the Army, Federal Emergency Management (FEMA) and others, told CNN Money.
Businesses relying on government contracts have become increasingly strained from uncertainty. Since 2009, Congress has dragged its heels on passing any kind of formal budget, relying instead on short-term extensions of existing spending levels.
But even if Congress does avoid the fiscal cliff, the unreliable future for many defense programs is already trickling down to businesses that support the industry.
Editor's Note: 46 million people in the U.S. are already living below the poverty line. And a group of economists warn we are about to witness dangerous civil unrest. Take a look.
"The inability of Congress to compromise and arrive at decisions on how to conduct the business of the United States means we're losing business," Dennis Chappell, VP of La Plata, MD-based Port Tobacco Consulting, told CNN Money. PTC provides resources to the U.S. military.
Ace Clearwater, an aerospace firm in Torrance, CA, began the year projecting a 7% revenue increase, but now expects sales to be flat, or even to decrease 10%, owner Kellie Johnson told The New York Times.
Johnson said the company had decided not to fill open positions in its work force, and canceled a half-million-dollar machine order to save more than $100,000.
"Everyone is sitting back and hunkering down," she said.
As scores of companies are in the midst of making budgets, they are not taking a wait-and-see stance. They are cutting out and cutting back-now.
According to the Congressional Budget Office, a non-partisan organization, if there is no other agreement and the fiscal cliff is crossed on Jan. 2, the United States could fall back into a recession in 2013.
That will have a tremendous negative impact on the global economy as Europe is in a recession and economic growth is slowing in China and India.
Based on the 320-point drop in the Dow Jones Industrial Average the day after President Obama's re-election, Wall Street is not bullish about the future of the economy.
Reinforcing this negative outlook, Fitch Ratings stated there would be no "fiscal honeymoon" for the Obama administration. Along with hitting the fiscal cliff, the U.S. government will reach the debt ceiling of $16.4 trillion.
In a statement, Fitch Ratings warned that, "The economic policy challenge facing the president is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the U.S."
Standard & Poor's, another of the major rating services, downgraded the credit grade of the United States in August 2011 from AAA to AA+.
And that could be repeated in 2013.
Fitch further advised that, "Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilize federal debt over the medium term, consistent with the U.S. retaining its 'AAA' status. Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch."
What is the Likely Outcome of the Fiscal Cliff?
It is likely that a temporary measure will be passed to avert the fiscal cliff.
While that is unlikely to please Fitch, Moody's and Standard & Poor's or Wall Street, it will protect the United States from the ill effects of the fiscal cliff that could result in the country plunging back into a recession.
While it does not receive much attention due to the approaching fiscal cliff, the United States has been operating without a budget resolution for years now. There has been a breakdown in the budget process in Washington, DC. Although the appropriations process is purely the purview of Congress, there still has to be agreement with the executive branch to pass a budget for the U.S. government. That has not transpired due to the existing poor relationship between the House of Representatives being controlled by the Republicans and the Senate being controlled by the Democrats.
Unless a budget deal is reached by the Republicans and Democrats before Jan. 2, 2013, the fiscal cliff will be come into effect with its spending reductions and tax increases. From that, the suffering will be felt across party lines and around the world.
And unfortunately the layoffs will follow. Your best bet is to prepare for worst case scenario by protecting your savings, your investments and your retirement. Here are 5 survival strategies you can act on right away.
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.
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 Cliff 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
Get Ready To Buy
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.
Editor's Note: A group of economists believe a dangerous catastrophe – 100 times worse than the Fiscal Cliff – is just over the horizon. Click here to learn how some of the foremost experts in the world recommend you position yourself for the uncertain times ahead.