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The Fiscal Cliff… and How You Can Profit from It

19 | By Shah Gilani

For starters, the problem with going over the fiscal cliff isn’t what you think it is.

It’s worse.

Because if we go over the cliff and there are meaningful (which means it’s about time) spending cuts and across-the-board tax hikes (which wouldn’t be so bad, except for this…), what do you think politicians are going to do with new revenues?

They’re going to spend them to offset the “sequestered” spending cuts that they’ll say are coming at the wrong time!

What are they going to do with all that revenue?

They’re going to come up with new spending schemes to redistribute their new revenues.

The Keynesians and the Socialists, who long ago infiltrated the Fed, are starting to make telling Democrats and Republicans apart virtually impossible. Why? Because they’re all Keynesians and Socialists now.

They’ve all become citizen saviors waving our money back in our faces promising to do stuff for us – with our money!

You should be laughing at yourself if you just realized that this was the game all along.

If you didn’t get that our government hacks – all of them – want higher taxes so they can pay off their masters with “special programs” (that means giveaways) to better this crony’s lot, or that crony’s plot, or this industry, or further some government agenda, then you didn’t get how corrupt and greedy American politicians really are.

Cutting spending and cutting taxes amounts to cutting off the hands of politicians. So, really, what’s the likelihood of those two things happening?

That’s the problem with going over the fiscal cliff, and markets are beginning to see it.

Let’s say we don’t get a miracle by Monday and there’s no meaningful address of the fiscal cliff issues; I think there’s a small chance we might get another “Lehman moment.”

Dow futures were down 200 points after the market closed on Friday. That’s after it closed. That means the hedgers and speculators were selling futures ahead of what they expect to be a very ugly Monday.

Of course, I could be wrong. There could be a relief rally if something – anything – that makes sense for our economic future comes out of Washington before markets open around the world early on Monday morning.

I said I could be wrong. But I don’t bet on woulda, coulda, shouldas.

Make sure you have stop-loss orders down on your investment and trading positions, unless you want to be adding to core positions at lower levels.

If markets tank next week get out and get to the sidelines.

There will be plenty of time to get back in, If you’ve got plenty of capital at the ready and we do get a major sell-off, which could – according to some of my metrics – last a couple of quarters, there will be lots of possible generational buys to be had when the dust settles.

I’m not saying that’s what’s going to happen. What I am saying is, it’s a possibility.

Good luck to us all,

Shah

19 Responses to The Fiscal Cliff… and How You Can Profit from It

  1. Paul Moody says:

    I love your comment about politicians waving our money in our faces promising to do stuff for us. It is true, and you are right on point. I understand your point of view on our government, on the Fed, etc. I would love to see you do an article on why you think the general public does not understand what is happening, or if they don’t want to understand as long as “Operational Entitlement” continues. I really appreciate your common sense and clear messages.

  2. Edouard D'Orange says:

    I believe you when you say that U.S. politicians are “corrupt and greedy.” But I don’t believe that we will have a financial Armageddon or “Lehman moment.” There will be some program or some policy change and most everything in the market will rebound and we’ll keep this ball rolling. We always do; politicians and the Fed won’t let financial markets tank. Not being overly optimistic, just realistic. Then again, I don’t have any money in the markets or banks because of other reasons (mostly because I don’t have any money).

  3. Jeff Pluim says:

    I thank God that I live in Canada, with a Prime Minister who has a degree in economics, and a very fiscally conservative Finance Minister. I also believe that the generally higher education level here in Canada verses the U.S., means that our populace will be more inclined to not vote for politicians who tow the socialist line. The biggest challenge our two countries face is dealing with idiots who do not understand the basics of economics. Whenever I get into a political discussion with someone who is promoting a left leaning politician, I ask them “what do you know about economics and economic policies?” The answer is always the same, “nothing”. I always then say “I rest my case”. It seems to me that it is only the stupid and/or uneducated people who vote for socialists. It appears to me that the States have an over abundance of both lately.

  4. ASHLEY GOODMAN says:

    THE COUNTRY IS A MESS. NOT BECAUSE THERE ARE SOCIALIST PROGRAMS. NOWK WHO IS GOING TO DISPUTE SOCIAL SECURITY OR MEDICARE, MEDICADE. THE PROBLEM IS THAT THE GIVEAWAYS GOES TO EVERYBODY RICH WHO DON’T NEED AND THE POOR WHO IN MANY INSTANCES DON’T DESERVE IT AND DIDN’T WORK FOR IT. BUT WE HAVE SOCIALISM FOR BIG CORPORATIONS AND BANKS AND INSURANCE COMPANIES AND THEIR LEADERS AND FOR CONGRESSMEN AND WOMEN. WHO ARE USELESS. KEYNES WAS NOT A SOCIALIST. HE WAS A JOSEPHIST. LIKE IN THE BIBLE THAT WE SO PROUDLY POINT TO AS A VISIONARY AND PRACTICAL MAN. I SUGGEST WE KILL OFF THE EXCESS POPULATION AS A WAY TO AVOID A SOCIALIST SOCIETY WHICH SEEMS INEVITIBLE IF WE KEEP PRODUCING PEOPLE WHO WE DONOT NEED TO OPERATE AN ECONOMY. WE GOT 3D MACHINES AND NANOTECHNOLOGY AND DNA. WHAT’S YOUR ALTERNATIVE AND WILL IT WORK WITH A POPULATION OF 7 BILLION.

  5. Rick says:

    I saw through the FED along time ago, and the Socialists in D.C. (that’s the district of criminals) because that’s what they are.

  6. Moses Adewole says:

    Fiscal cliff denotes increasing taxes that generate more revenue. The generality of opinions tend to frown against expanding spending, while it ought to be conceivable that with increased revenue from the people would be increased spending to make available money they need to be more productive-give more money to agriculture, businesses, housing, security, schools, etc.However, that view is not popular, but should the people get less with more taxes ? Keynes solved 1929-30 depression by pumping money, in the main, into the depressed economy, thereby increasing spending to solve depression

    • Reality Check says:

      Oh my, you need to re-read your economics books. (Did you read them in the first place?) Keynes did not “solve” the depression. The bad times were still going strong into WW2. The war solved the depression…of course, it gave us a different kind of “depression.”

      Most people do not frown upon expanding spending…most people frown on expanding DEBT to promote spending. There is a world of difference.

  7. Brian Riordan says:

    More Taxes and more Spending Cuts. If the Cliff thing never happens, it will stay at less taxes and less Spending Cuts than if they went over the Cliff. Water always finds its own level. That’s what’s supposed to happen. Either way, the deadline will probably go by with out a seam. Not scared, but prepared. Hmmmmm Sounds like a Johnny Cockran phrase.

  8. NORBERT WEST says:

    HOW CAN WE PETITION TO CHANGE THE NAME OF THIS COUNTRY? IT IS AN INSULT TO THE COUNTRY THAT ONCE WAS AND TO THE BLOOD THAT WAS SHED FOR IT THAT THIS NATION THAT REMAINS BE CONTINUED TO BE CALLED THE UNITED STATES OF AMERICA ! ! !

  9. Kevin Beck says:

    Who ever heard of a politician doing the right thing, especially when there’s OPM involved? I sure haven’t.

    Then there are the fools that don’t recognize when their own money is being waved back in their faces by these hacks. Ask yourself, when you keep in mind what William Buckley said years ago: Would you rather have your life governed by 500 elected dim-bulbs from around the country, or by your neighbors?

    If you still think the world is better off when you have all the decisions made for you by the boobs in power in Washington, then I would prefer you get your hands as far away from me and my ass(ets) as possible.

  10. Michael says:

    It’s NY Eve here in NZ, it’s a beautiful warm Summer’s day with a light breeze flowing through the Palms and Panga Fern Trees. A perfect time to sit outside and sip my 1st Coffee and reflect on my life and memory’s of summers past (all 62 of em). I fondly recall the late 60′s summers as a Testosterone fueled Lad of 17. Living at a Lake in Southern Michigan, water skiing, laying on the Beach and playing Mini-Football with the Pack when someone dug the mini football out of their bag. The games got pretty serious if there were good numbers for sides and a lot of bronzed and beautiful Girls to impress were watching from the blankets – listening to CKLW on the portable transistors all tuned to the same station. Ah, those memories!! Not a care in the world and the world in your hand…until the game got too competitive or the teams were lopsided with winners and losers.
    A problem occurred – if the guy who owned the Football was on the losers side and couldn’t take the heat of the game, or watching the Girls watching the winners- win!
    It dawns on me just how similar life is today 40 odd years down the track… when the Guy who owns the Football takes his ball and leaves… It ends the game and takes the charge out of the air…Poof it’s gone!
    What if – The coming Fiscal Cliff is like a Game of Beach Football and the Loser’s (Middle Class) who own the Football (The Workforce, and Retirement Savings) and get completely Fed-up with the Stacked Sides (Government & their Puppet-Masters) – they (we) take what’s left of their (our) Football ( Collectively 80% of the wealth of the Country) and they (we) walk away from the game (Scam)??
    Has anybody considered this as a real possibility as a result of being scammed to death by the Markets, IRS, State & Federal Governments, Banks & Federal Reserve and Multi-National Pigs 1st in line at the Trough of the “American Dream” ?? Do all the Radio’s on the Beach start playing “Sympathy for the Devil”??? Or does the Music STOP???

  11. Robin says:

    Stop this crap about socialist. Ameria was socailist before Russia. There is need for free enterprise. where capital and labor can eqaully persue their respective interest fair and square. Not the preference given to capital and the unfair constraint of labor.

    • Elvira says:

      As a Counterpoint to specific angemurts about Obamacare,are more general economic analyses,because,of course,big programs involve economics. From the Wash Times today, Tempting the tipping pointRate:Can the U.S. escape a fiscal death spiral? Tempting the tipping pointBy Richard W. Rahn If governments continue to pile on more and more debt, when will they reach the tipping point? The Greeks appear to be close to the tipping point, and it is only a matter of time before other European countries, and eventually even the United States, begin their fiscal death spiral.(There is a very good chance that we’ve hit this tipping point of no return) Japan has tried to spend itself into prosperity by issuing more and more debt. Up until now, it has avoided inflation but has suffered a decade of economic stagnation, with a falling share of world gross domestic product, and the situation can only get worse.The Obama administration and the Congress are in a headlong rush to push the country over the fiscal tipping point. The fiscal tipping point is the point where the interest that premium bond buyers are demanding to compensate them for the risk of default and/or accelerating inflation causes the total interest cost to be so high that the government is borrowing just to pay the interest. This is equivalent to a family being so far in debt that it is borrowing just to pay the interest on its mortgage, credit cards, etc.The proposed health care plan and the environmental cap-and-trade scheme will add trillions of dollars to the U.S. debt over the next few years and, in all likelihood, soon will drive the total debt burden to well over 100 percent of GDP. Even if the administration were to tax the rich at 100 percent of their incomes, there would still not be enough money to pay for all of these spending schemes.The following should be known to most members of Congress. The size of the U.S. government is already well over the welfare and economic growth-maximizing rate. Taxes on upper-income Americans are well above the revenue-maximizing rate. Thus, for those in the political class to further increase the size of government and government debt as a percentage of GDP is grossly irresponsible. It is almost as if they had a death wish for the country.Humans are quite good at adapting to climate change. Our species has already lived through hundreds of climate cycles. What they are not good at is adapting to the fiscal and monetary falsehoods of politicians. Yet, the politicians would prefer to fly around the world talking about climate change rather than putting their fiscal house in order.Bond buyers are not stupid. They can see what is happening. If the administration and Congress do not soon reverse course, the cost of servicing the debt will quickly drive the U.S. to the fiscal tipping point.Once the tipping point is reached, government will shrink one way or another, because there will be no way to fund the previous bloated state. Who will be most hurt? Those most dependent on government. MY COMMENTS:The biggest problem we have as concerned citizens on National Fiscal policy is that we have no accurate #s to work with. For example,the Term National Savings Rate is meaningless because the Feds define Debt Reduction as Savings. Nothing could be further from the truth. Paying down Debt has absolutely nothing to do with savings. Other totally bad #s include terms such as GDP,Inflation,Deflation,Government Liabilities,Tax Revenues,Household Debt,Asset Valuation etc etc etc. Without credibility in our national Accounting,we have no factual basis to even have a discussion. I realize that all these bad #s are a symptom,but of what disease. I think it is TIPPINGPOINTITIS;we have entered a major Depression,Early stage,that’s my Diagnosis. You can’t prove me wrong any more than I can prove myself correct,we have no dependable #s to base an argument on. We can no longer assess the Net True Worth of a publically held major Bank like BOFA or CitiBank,because the rules allow a major portion of a bank’s liabilities to be undisclosed to an investor. You can bet that Geithner and Bernanke know to the penny what rotten assets are hidden,but they’re not going to disclose those #s on the pain of waterboarding;they would and should cause a national panic,again.The Tie in to ObamaCare:it isn’t relevant what it costs,because we are Tipping towards financial oblivion, ironically,the faster this disaster occurs,the faster we actually have to deal with it.

  12. Ian Morton says:

    Thanks for the comments, I am a grain farmer (77 years old) in Western Australia and have small super fund that needs looking after, trying to run a grain producing farm here now if you have borrowed from our banks ( they just charge interest what they like once you get a bit behind 9.2 excess 13.2) and we sell the grain to traders who really have us by the short and curlys. Because so many of us are so far behind with the banks, whey will sell us up for around half of the value of a few years ago, have you any idea what we could or should do?
    Regards Ian

  13. H. Craig Bradley says:

    You’re spot-on Shah. President Obama has absolutely no intention of cutting Federal spending, at all. Even with the “fiscal cliff” President Obama gets the tax increases he wants. In fact, he wins either way. Fact is, Obama can not afford to reduce spending Why?

    Most of the so-called growth in GDP is due to government spending. Take out the Federal and State government spending and what’s left in the way of real private sector growth? Darn Little, probably only .5%. So, the numbers are jacked-up to make the voters feel good. But do they feel good with consumer and small business sentiment so low these days? I doubt it.

    So, since markets always follow public sentiment, I do expect the markets to get ugly next year. I would not be surprised to see a 2,000 point decline in the DOW and S&P this Jan-March 2013. Just watch Apple (bellweather) go back to the $400′s. Like you said, get out your shopping list of stocks and bide your time. In a year, the prices will be fabulous- after the recession of 2013 is over.

    Unfortunately, we never had a true economic expansion following the 2007-2009 Recession. Instead, we have been bouncing along the bottom for the last 5 years. By the way, all economic contractions prior to 1932 were called “depressions”. However, after the “Great Depression” of the 1930′s, Federal government bureaucrats and politicans changed the terminology to “recession” instead. President George W. Bush changed the nominclature once again in 2008 to an economic “slowdown”. I don’t think he fooled anybody that was not already a fool.

  14. fallingman says:

    Absolutely.

    If you give an alcoholic a case of beer, what do you expect him to do with it? He’ll drink the whole thing strtaight away and go looking for more.

    If you give a politician hundreds of billions of other people’s money, what do you expect him to do with it?

    The anti-tax people are being excoriated now for being “inflexible”…”extremist”…”rigid”…”ideological”, etc. etc, ad nauseum. Pure propaganda from the statist tax pigs for whom no amount is ever enough.

    Hey, I just don’t want to fund the alcoholic’s next bender. I call that “practical” and “sensible.”

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