Stocks & Equities
Markets Will Drop at Least 20% “Actually I am not surprised the market is selling off because technically the market was weak already for a couple of months and we are in a down trend Mr Obama’s economic policies are obviously not good for an economic expansion”. Gloom, Boom & Doom’ report editor Marc Faber reacts to Obama’s victory and how it will impact investors in this Video Report 3:40 minutes:
Extend and Pretend
Now that President Obama has been re-elected, the media is finally free to focus on something besides the clueless undecided voters in Ohio, Florida, and Colorado. The brightest and shiniest object that has attracted its attention is the “fiscal cliff” that we are expected to drive over at the end of the year unless Congress and the President can agree to turn the wheel or apply the brakes.
Fresh from his victory, the President took time today to let the nation know how he proposes to avoid the cliff: to raise taxes on those Americans who make more than $250,000 per year. He made clear that no one making less than that will be asked to pay any more. The two percent of taxpayers that the President is targeting earn 24.1% of all income and pay 43.6% (as of 2008) of all personal federal income taxes. Sounds like a fair share to me. But the four or five percent tax increases on those earners that are being proposed would only yield around $30 to $40 billion per year in added revenue, a drop in the federal bucket. Even if they were to double the amount that they pay our deficit would only be cut by about one third (even if those increases did not trigger an economic slowdown).
So what exactly is this looming menace, and why is it so dangerous? Stripped of its rhetorically charged language the fiscal cliff is simply a legal trigger that will trim the deficit in 2013 by automatically implementing spending cuts and tax increases. In other words, the government will spend less, and more of what it does spend will be paid for with taxes rather than debt. Isn’t this exactly what both parties, and the public, more or less want? The fiscal cliff means that the federal budget deficit will be immediately cut in half, shrinking to approximately $641 billion in 2013 from the approximately $1.1 trillion in 2012. What is so terrible about that? I would argue that there is a greater danger in avoiding the cliff than driving over it.
If you recall, the cliff was created by a deal last year when Congress couldn’t find ways to trim the deficit in exchange for raising the debt ceiling. When they failed to reach an agreement, Congress knew they had to raise the debt ceiling anyway. The resulting Budget Control Act of 2011, signed in August of that year, offered the pretense that they were dealing with our long-term fiscal crisis and not simply raising the debt ceiling with no strings attached. This was done not only to appease some House Republicans, who had threatened to vote against a debt ceiling increase, but to satisfy the bond rating agencies that had threatened a down-grade if Congress failed to act.
Now the focus turns to how Congress will dismantle the structure it created just 16 months ago. There can be little doubt that they will as economists are assuring politicians that driving over the fiscal cliff will immediately bring on a recession. The expiration of the Bush era tax cuts for all taxpayers will cost Americans an estimated $423 billion in 2013 alone. Hundreds of billions of across the board spending cuts, including the military, have been delineated. No politician would allow that to happen.
It is amazing that members of Congress can keep a straight face as they claim to want to address our long-term deficit problem while simultaneously working to avoid any substantive action. No doubt an agreement will be reached that will replace the looming fiscal cliff with another one farther down the road (which they can easily dismantle before we actually reach the precipice). Will the rating agencies buy this bill of goods a second time? If we lack the political courage to go over this fiscal cliff, why should anyone think we will be able to stomach going over the next one? Especially since each time we delay going over the cliff, we simply increase its future size, making it that much harder to actually go over it.
Many currently believe last year’s S&P downgrade resulted from the same congressional dysfunction that resulted in the fiscal cliff agreement. The truth is that the downgrade would probably have been much greater, and more rating agencies would have likely joined S&P in taking action, had it not been for the fiscal cliff agreement. If further downgrades fail to be issued when the lame duck Congress inevitably comes up with another can kicking deal, then the agencies themselves could lose any remaining credibility. In my opinion, the only explanation for inaction by the rating agencies would be for fear of regulatory retaliation by a vindictive U.S government.
I do not think it is a coincidence that while the banks are suffering a regulatory backlash as a result of their perceived culpability for the mortgage crisis, the credit rating agencies have been relatively untouched. But the credit agencies played a key role in catalyzing the mortgage crisis by giving questionable ratings to the mortgage backed securities. My guess is the government simply does not want to open up that can of worms as similar mistakes are being made with respect to the agencies’ ratings of government debt.
The truth is that regardless of what you call it, going over the fiscal cliff is not the problem, it is part of the solution. Our leaders should construct a cliff that is actually large enough to restore fiscal balance before a real disaster occurs. That disaster will take the form of a dollar and/or sovereign debt crisis that will make this fiscal cliff look like an ant hill.
“The Rubicon is a river in Italy that played a major role in the history of Rome and Western Civilization. Prior to Julius Caesar, it was considered an inviolable boundary for a general commanding an army. To cross it with your army was considered an act of treason against the State.
Caesar did just that in 49 B.C. Caesar left Rome to be come the governor of Cisalpine Gaul (northern Italy), Illyricum (southeastern Europe) and Transalpine Gaul (southern France) in 58 B.C.. Actually, he unsuccessfully fled Rome to avoid his mounting debts (he liked to gamble and was a bon vivant). He was only allowed to continue to Gaul after his wealthy friend Crassus paid and guaranteed the debts for him. His conquest of all of Gaul and the details of his military genius are well known, particularly since he wrote it all down in the form of a partial autobiography.
Ambitious men were not welcome to the old Roman order. The Romans had an unpleasant experience with a dictator that led to their founding, and it was in their DNA to despise such men. Caesar was a major threat….
…..continue reading this Robert Fitzwilson piece HERE
Well, we have the results of the elections in. As everybody knows by now: Four more years of President Obama.
Not that it matters really at all. The free markets and this coming sovereign-debt crisis to the United States is far-more-powerful than any one particular president, than any government, than any central bank, as I’ve told you many times.
The outcome of the sovereign-debt crisis and the trends that are in motion in the markets will not change no matter what President Obama and Congress does.
Right now the focus has turned to the fiscal cliff. I do believe that the fiscal cliff will be resolved. The can will be kicked down the road, probably at the eleventh hour on December 30 or something like that. But I do believe that Washington will kick the can down the road.
Let’s go right to the markets, starting with gold:
Interestingly, gold was unable as you can see to penetrate that $1,800 resistance area that I told you was very strong. It has since taken quite a sharp nosedive — down to some technical support at the $1,680, $1,670 level — (and) bounced back up to $1,700.
We should soon see another leg down that pierces this rising uptrend line here and brings gold down substantially. First to roughly the $1,640 level, where we have some minor technical support. Then to the $1,526 low down here. And then much-lower than that, probably below $1,400. That is still very much in the cards.
Silver: Let’s now focus our attention on this weekly chart of silver.
Silver largely did the same thing — it was unable to take out the $35, $36 level and then it turned sharply lower down to about the $32, $31.70 level.
I do expect a little sideways action, but I also expect this rising uptrend line here, in the lower part of this channel, to soon give way. And then silver could plummet quite hard with the first support level at the prior four tests of the $26 level.
Then, once that gives way the fourth way through — the fourth time through either support or resistance is usually the most violent — we should probably see silver move down to the low-$20s.
I continue to recommend very strongly that you stay away from silver on the long side.
U.S. Dollar: Here is the weekly chart.
The Dollar Index is still starting to climb gradually, but it’s finding support and we’re starting to see a pretty decent rally here. That is because, as Europe continues to worsen, most money in Europe is going to cash … and into dollars.
Also, the fiscal cliff is not going to be bearish for the dollar, because (at) the slightest signs that the U.S. economy is slowing or taxes are going up, we are going to see the so-called “risk off” trade and liquidation in the United States as well … which will help give underlying tone to the U.S. dollar.
The Dow Industrials: Here is the weekly chart.
The Dow, as I’ve been telling you, was going to have a very difficult time at that 13,613 level. And indeed, the day after the elections, we saw quite a sharp nosedive in the Dow.
The Dow Industrials now are going to succumb to worries about the fiscal cliff, to anticipated fourth-quarter earnings that will come in weaker than the third quarter, and (to) overall uncertainty and anxiety about the market.
We should see a move down to at least 12,600 in the next few days. Once that level gives way we’ll probably move lower, 11,500 by year-end is not out of the question.
So please stay tuned to everything I publish.
Have a good week!
Larry
Larry Edelson has over 34 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Power Portfolio provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.
For more information on Real Wealth Report, click here.
For more information on Power Portfolio, click here.
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