For those that have been living under a rock for the past 6 months, what is the Fiscal Cliff?
The Fiscal Cliff is a combination of tax increases and spending cuts that the US Congress agreed to a couple of years ago. They postponed the implementation until January 1, 2013, after the presidential election. The conclusion from the Congressional Budget Office is that if we allow the tax increases and cuts to occur, it will send us into a recession and raise unemployment from 7% to 9%.
How do you think the Fiscal Cliff will affect the average Joe?
There are several scenarios. If no change to the current plan is enacted, and we “go over the fiscal cliff” Joe’s taxes will rise. If Joe is on Medicare or Medicaid, his benefits will likely be frozen or cut. If Joe is a defense contractor, he might lose his job.
If Congress and the President come to some sort of agreement, then Joe’s taxes won’t rise as much, and any benefits that he gets from the federal government are likely to stay in tact.
What are the implications for option traders?
I think option traders are best positioned for the coming economy. They tend to understand the economy better and can be more nimble in trading the increased volatility that is likely in the coming years.
What are the current dividend and capital gains tax implications of the Fiscal Cliff?
It is likely that the final agreement will include increased taxes on dividends and capital gains. How much is still up for grabs.
What is your take on the current state of negotiations?
As of this afternoon, they were still negotiating. It’s down to a couple of folks from each side in a “smoke-filled room” trying to hammer out a deal. In America, we have a long history of objecting to taxation without representation. It seems that the current deal making is excluding my representatives. Perhaps that’s the only way to get something done, but it still tastes bitter.
Who is being more stubborn, the Republicans or the Democrats?
It depends on how you define the word stubborn :). If you believe that we are spending too much money in this country, and there really aren’t enough rich people to fund the level of spending that we have gotten used to, then you would try to stick to your guns and demand more spending cuts than tax increases to get us toward a somewhat more balanced budget.
If you believe that it takes investment to grow the economy and a growing economy is key to getting us out of this mess, then taking more money from the wealthy may not make sense.
If you failed third grade math and think it is just fine to spend $3 Trillion every year while only taking in revenue of $2 Trillion, then you might want to continue spending us into oblivion.
Can you tell which side I lean toward? 🙂
Why did Washington create the Fiscal Cliff anyway?
Our spending is out of control, and our national debt is too high. The law that created the fiscal cliff was enacted to try to get our spending closer in line with our revenue. One could easily argue that we need to go over the fiscal cliff, and that would actually be healthy long term, but politicians are rarely interested in any long-term benefits if there is an election to be won or a photo op to be had.
Today is December 31st, what happens tomorrow if there is no deal? What about in 3 months time?
They can always make any changes retroactive to the first of the year, so I don’t think there is really a “drop dead” day.
Do you think corporations have been reluctant to expand given the uncertainty?
If you were running a company, how would you plan for the coming year? How much will your tax bill be? You don’t know. Will the economy start to grow or shrink? You don’t know. Will your customers be in good shape, or will they be hesitant to buy and expand? You don’t know. Should you hire additional staff? Probably not just yet. The uncertainty is a big factor in our slow economy.
How concerned are you about the long-term future of America?
Very. We spend too much money that we don’t have. Our national debt is too large. If (or when) interest rates rise, the amount of interest that we will have to pay to service our $16 Trillion debt will kill us. And by the way, there is nothing in sight that says we won’t be at $20 Trillion at the end of the next four years.
Has the US ever faced a similar situation in the past?
No, I think this time it really is different.
Are you concerned that the US may spiral into a 1930s-style Great Depression?
I’m hopeful that it won’t be significantly worse than the 1930s.
Do you think that the US credit rating will be downgraded?
Absolutely. If not, then the ratings agencies are liars and idiots.
However, the US is in a unique situation. We won’t really default on our debt; we will just print some more dollars and pay our bills. Given that scenario, maybe it is reasonable to say that our rating should be high. However, we will repay our debts with dollars that aren’t really worth a full dollar.
Your outlook seems to be pretty negative. Is there a scenario where we come out ok?
One thing that will help the US economy is if we can significantly increase exports. If we can make something that we sell abroad, money will flow into this country to help our economy. One thing that may save us in the long run is natural gas. We have discovered significant reserves that can be harvested with new drilling technology. The price of natural gas in the US is significantly below the world market. If we can increase our drilling and our exports of liquefied natural gas, that could be a significant help to our situation.
Also, technology continues to advance on all fronts. There is a chance that it can come to the rescue over the next decade, driving down cost of goods, making everything more efficient and more productive.
US money supply has trebled since 2009, are you concerned about inflation? If so, how can people protect themselves?
Yes, inflation is a real concern in a few years. I don’t know when rates will start to increase, but I expect them to. However, a significant increase in inflation is unlikely until we start reducing unemployment. It is difficult to have inflation when there is such high unemployment. And the Federal Reserve has declared that rates will be low through 2015.
In my book, Fiscal Cliff Investing, I outline several strategies for protecting yourself from a market downturn and from inflation. Buying gold is certainly a strategy that everyone should employ. I don’t think you need to go crazy just yet; we are still probably a few years away from increasing inflation that will drive gold prices significantly higher. In the mean time, putting a few percent of your portfolio into gold or silver is probably prudent. Option traders can be more nimble and use bullish strategies on the major gold ETF (GLD).
So do you think everyone should move to cash and gold and hide from the market?
Oh, no. The market could have some good uptrend left in it. Remember that quantitative easing from the Fed is pushing the market up. While you might think it is artificial, it is still an upward pressure.
What I discuss in my book is how to be defensive in stages and how to decide when to get more defensive. I expect some euphoria with a fiscal cliff solution so you don’t want to be out of the market out of fear. However, if there is a downturn, you need to be ready and know how to respond in stages.
If they fix the Fiscal Cliff, can we breathe a sigh of relief?
I don’t think so. The current “fiscal cliff” is the well-publicized version. Everybody is talking about it. But what people aren’t talking as much about is the national debt, our credit rating, inflation, and interest rates. I think we can easily see a worse “fiscal cliff” in a few years. And in between now and then, there will be volatility on all fronts.
The strategies in my book will serve investors well at some time (or actually many times) in the future, regardless of what pretend-resolution comes out of Washington this week.
Where can readers get your book?
Fiscal Cliff Investing – Strategies for Investment Protection is available as a Kindle book on Amazon. You don’t need a Kindle to read it, though. You can download a free app to any device or even read it online with your web browser.
Gav, thanks for the opportunity to chat with your readers. It looks like some sort of agreement might be reached today. Here’s a pretty good summary from CNN – http://www.cnn.com/2013/01/01/politics/fiscal-cliff/index.html
Are we on the right track? What do your readers think?
John
What do you make of today’s announcement John? Are we just kicking the can down the road?