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Featured Story
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.
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.
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New Report on Fiscal Cliff 2013 Details Our Painful Future
Are you worried yet about fiscal cliff 2013?
If not, here are millions of reasons to be concerned.
According to a report released today (Friday) from the National Association of Manufacturers, "The "fiscal cliff' is still two months off, but the scheduled blast of tax hikes and spending cuts is already reverberating through the U.S. economy, hampering growth and, according to a new study, wiping out nearly 1 million jobs this year alone."
The report, titled "Fiscal Shock: America's Economic Crisis," details how the fiscal cliff could destroy some 6 million jobs through 2014, and send unemployment skyrocketing to nearly 12%.
"The worst could be ahead," the report said. "If the fiscal contraction happens, the economy will almost certainly experience a recession in 2013 and significantly slower growth through 2014."
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Peter Schiff: If You Think the Fiscal Cliff is Bad, Just Wait
Forget the fiscal cliff, says economic expert Peter Schiff. This country faces a far bigger financial crisis.
While the failure of Congress to act to prevent or mitigate the fiscal cliff - the combination of tax increases and federal spending cuts due to hit on Jan. 2, 2013 - would slam the economy hard, Schiff says it would be preferable to the crash he foresees.
"It's not because we go over this phony fiscal cliff, it's probably because we don't go over that one because the government cancels the spending cuts, cancels the tax hikes, and instead we end up going over the real fiscal cliff further down the road," Schiff told Breakout recently.
Schiff, the CEO and Chief Global Strategist of Euro Pacific Capital, said the real threat to the U.S. economy is "where interest rates spike and we can no longer afford to pay the interest on the enormous amount of debt we have."
He also blamed the Federal Reserve's zero interest rate policy for making government borrowing too easy.
The national debt, fueled by annual budget deficits of more than $1trillion, crossed the $16 trillion threshold at the end of August. At current spending rates it will hit $17 trillion next June.
"We can't keep interest rates artificially low to stimulate the economy because it's the low interest rates that are the source of the problem," Schiff said.
That about a third of the U.S. debt is held by foreign countries such as China and Japan is a ticking time bomb.
"In fact, the real fiscal cliff comes when our creditors want their money back, and we don't have it," he said.
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Fiscal Cliff: How Each Candidate Plans to Save Us
America is moving closer to falling off the dreaded fiscal cliff, but Congress continues to move at a snail's pace in addressing the pressing subject.
And while the nation waits for a resolution, the costs of doing nothing are rising, with U.S. taxpayers' money at risk.
Lawmakers have taken a "hurry-up-and-wait" stance, putting off until after the November presidential election any decision-making about the most crucial matter currently facing Congress.
At issue is whether to extend some or all of the Bush-era tax cuts and how to handle the nearly $1 trillion in spending cuts slated to kick-in starting Jan. 1.
If the expiration of tax cuts comes to fruition, the result will be the biggest tax increase ever levied on Americans (Taxmageddon 2013).
If the spending cuts start rolling out, thousands of jobs will be lost, our country's security will be put at risk, businesses will sorely suffer and programs that rely on government contracts will disappear.
With just a few weeks before ballots are cast for our next president, the looming fiscal cliff has become a heated topic on campaign trails. Falling off the cliff would undoubtedly thrust the struggling U.S. economy into a recession in 2013, a consequence neither contender wants to tackle.
So how do they plan to avoid the fiscal cliff? Let's take a look.
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Fiscal Cliff 2013: The Biggest Threat To Your Profits?
Fund managers aren't taking any chances with fiscal cliff 2013 - they're making sure their portfolios are ready now.
That's because global money managers view the looming fiscal cliff as the biggest current threat to investors' profits.
A new Bank of America Merrill Lynch Fund Managers survey this month revealed anxieties about the approaching and almost imminent fiscal cliff, which the country will go over Jan. 1 if Congress doesn't act, now for the first time in 18 months trump fears about the Eurozone sovereign debt crisis.
At the forefront are worries over trillions of dollars of spending cuts set to kick in at the start of next year that will threaten our national security, millions of jobs, and government-funded programs. Those colossal cuts will coincide with the expiration of Bush-era tax cuts which will amount to the biggest ever tax increase on American taxpayers.
The double whammy now has 35% of fund managers citing the fiscal cliff as the biggest danger to investments.
On the flip side, angst over the European debt mess as the top investment worry has waned to 33% from 48%. The drop follows the recent announcement of further support from the European Central Bank and its launch of outright monetary transactions (OMT), or bond buying, to reduce the cost of buying for bordering Eurozone countries.
The figures are from a Sept. 7-13 BofA survey of 253 managers who invest some $681 billion for clients.
Uncertainty surrounding Election 2012 has made the fiscal cliff effect a bigger threat.
"The upcoming election is putting these fears into sharper focus," noted Michael Hartnett, chief investment strategist at Bofa Merrill Lynch Global Research.
But instead of living in fear, you can feel safer by following the same preparation as some of the biggest global money managers.
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The 10 Most Pressing Questions About the U.S. Economy – And Their Answers
Will the economy lapse into a double-dip recession? What can be done about the soaring U.S. budget deficit? What's next for the stock market?
These are just a few of the tough questions facing investors. And there may be no one better to offer answers, insight, and advice than Money Morning Contributing Editor Shah Gilani.
A retired hedge-fund manger, Gilani has routinely been there to shepherd investors through blinding market uncertainty. He's used his contacts on Wall Street to give Money Morning readers the inside scoop on the collapse of American International Group Inc. (NYSE: AIG), the May 6 "Flash Crash," and most recently the "Mortgagegate" scandal that currently threatens to undermine the fragile U.S. recovery.
Indeed, Gilani has been a tireless advocate for investors and a prescient market maven. That's why Money Morning's editors recently sat down with Gilani to talk about today's most pressing issues and discover what he expects for financial markets in the months and years ahead.
In the partial transcript of that interview below, Gilani discusses why it's a good time to invest in stocks, what steps should be taken to fix the U.S. economy, and whether or not gold prices have peaked.
In short, the U.S. government has failed the public as a matter of course, but there is still a way out of our current economic malaise and ample opportunity for investors to profit.
To find out the answers to the ten most pressing questions facing the economy, read on... Read More... -
Question of the Week: Investors Prepare for State and Local Governments' Tight Budgets
It's been 25 years since state and local governments across the United States were in such bad shape - and the budgetary pain is far from over.
The state-funding gap is growing, local governments lost 76,000 jobs last month, and property tax receipts are slated to fall for years.
"While the recession might have officially ended on the national level, cities are in the eye of the storm and the problems are intensifying," Christopher Hoene, a director at the National League of Cities, told The Financial Times.
A study released last week showed that big U.S. cities could face a painful financial squeeze: Their pension plans are under-funded to the tune of $547 billion.
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We Want to Hear From You: Are You Vulnerable to the Budgetary Woes of Your State and Local Governments?
It's been 25 years since state and local governments across the United States were in such bad shape - and the budgetary pain is far from over.
The state-funding gap is growing, local governments lost 76,000 jobs last month, and property tax receipts are slated to fall for years.
"While the recession might have officially ended on the national level, cities are in the eye of the storm and the problems are intensifying," Christopher Hoene, a director at the National League of Cities, told The Financial Times.
A study released this week showed that big U.S. cities could face a painful financial squeeze: Their pension plans are under-funded to the tune of $547 billion.
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Money Morning Mailbag: Ending Bush Tax Cuts Not a Cure-All for U.S. Financial Woes
The question of whether or not to extend the Bush tax cuts will be a pivotal issue as Washington prepares for this year's midterm election.
The Congressional Budget Office yesterday (Thursday) reported that extending the tax cuts would result in only short-lived economic benefits.
"[It would provide] a considerable boost to economic activity in 2011 and beyond for a few years," CBO Director Douglas Elmendorf told CNN. "Over time, [however,] the negative consequences of very high federal borrowing build up."
The CBO reported that if the cuts for most U.S. taxpayers were made permanent - as proposed by U.S. President Barack Obama - the nation's accrued debt (not including money owed to Social Security and other government trust funds) could climb to 100% of gross domestic product by 2020, up from 62% this year.
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Battle Over Expiring Bush Tax Cuts Likely to Shape Fall Elections
A colossal battle is shaping up in Congress over what to do about the Bush-era tax cuts that are set to expire at the end of this year. It's an issue that entails sufficient economic and political consequences that could shape the fall elections and fiscal policy for years to come.
The expiring tax breaks received little public attention this year as Congress tussled with heavyweight issues like healthcare reform and financial regulation. But the fate of the tax cuts will be a major focus of debate in September when lawmakers return to Washington from their summer recess and the midterm campaign gets rolling.
"It has enormous ramifications for the fall and clearly will be one of the dominant issues," Sen. Ron Wyden, D-OR, told The New York Times. "This is code for the role of the federal government, the debate over the size of government and the priorities of the nation."
Democratic party leaders, including President Barack Obama, have said they want to extend the tax cuts for individuals earning less than $200,000 and families earning less than $250,000, while letting the cuts expire as scheduled for those exceeding those thresholds.
Most Republicans, and some Democrats, want to extend the tax cuts for everyone, characterizing any tax increases on anyone in this fragile economy as unwise. If no action is taken, taxes on income, dividends, capital gains and estates will all rise.
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State Budget Crises Threaten U.S. Economic Recovery
Across the country state budget crises are threatening to undermine the U.S. economic recovery.
Some 48 states are emerging from a round of painful budget cuts for their 2010 fiscal budgets, and at least 46 states face shortfalls for the upcoming 2011 fiscal year, which in most states began July 1.
The recession has caused the steepest decline in state tax receipts on record - and states will continue to struggle to find the revenue needed to support critical public services for a number of years as a result.
Since virtually all states are required to balance their operating budgets each year they cannot maintain services during an economic downturn by running a deficit, as the federal government does.
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G20 Summit Bogged Down by a Shaky Global Recovery
The Group of 20 (G20) countries concluded their weekend summit with an outline for reducing budget deficits and a delay in global banking reform, but failed to create a unified policy as nations find themselves in different phases of economic recovery.
Leaders pushed decisions on global banking regulations to the agenda of the November session in Seoul, South Korea. The meeting's concluding statement expressed unity in countries' desires to reduce debt, but did little to alter austerity plans and stimulus measures countries have already created.
"With the common efforts of G20 members and the international community, the world economy is gradually recovering, but the foundations of the recovery are still not solid, the process is not balanced and there are still many uncertainties," said Chinese President Hu Jintao. "All this shows that the deeper impacts of the financial crisis have still not been surmounted, and systemic and structural risks to the world economy remain very grave."
The G20 communique underscored the countries' focus on achieving "growth friendly" fiscal policies while acknowledging that leaders must reduce the budget deficits, although policies and budget cuts should be tailored to suit each individual nation.
"The path of adjustment must be carefully calibrated to sustain the recovery in private demand," the G20 nations wrote. "There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth."
Analysts said the divergent views on how to sustain economic recovery marked the lack of effectiveness of the G20 forum.
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How to Profit From Europe's Stealthy Resurgence
European countries - both inside and outside the Eurozone - are slashing their budget deficits.
Greece, Portugal and Spain - three of the so-called "PIGS" - have to do so, of course. But Germany - generally reckoned to be in excellent shape - is also cutting its deficit, as is France, which hasn't run a budget surplus in 40 years. Britain, too, with no need to protect the euro (it's not a Eurozone member) just introduced a budget that cut the deficit by $140 billion over four years.
U.S. President Barack Obama and other Keynesians warn that Europe may push its own economy - or even the global economy - back into recession.
But here's the surprising reality: Europe may gain from its fiscal pain - and its deficit-trimming actions offer the best hope for a lengthy recovery.
To see which European countries are expected to rebound - and which ones to invest in - please read on...
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