Juggling Dynamite

It is quite likely that risk markets may initially bounce for some period of time on news of an agreement out of Washington mitigating (deferring) elements of the “fiscal cliff”. It is also probable however that any such bounce will again be fleeting (as it was in 2010 and 2011) in the face of the spreading global recession, falling corporate profits and weakening consumption demand poised to continue over the next few quarters. It is important to understand that during secular bear deleveraging periods like our present climate, it is typical for the stock market to re-test the lows of the previous bear market phases, being in this case, 2002-03 and 2008-09 (see chart of Canadian TSX as an example below). Never a guarantee–the world is full of uncertainty; but weighing probabilities and adjusting allocations decisions accordingly, is the only prudent course for investors. Best to err on the side of capital preservation and keep eyes wide open.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

This graphic of the “fiscal cliff” gives a good summary of the tax increases in dollars terms for each taxpayer group which range from an extra $412 to $3500 maximum per year for 99% of tax payers, and up to 120K for the top 1% of income earners. More for sure, but hardly catastrophic or impossible to pay. The more serious impact will be in terms of a rebound in unemployment that is likely to follow from the government spending cuts currently slated for the new year. But these job losses could also be offset at least partially by new jobs in areas like an expanded focus on domestic energy. The dominant point is that the current spending/taxation regime is and always has been unsustainable. Affording expenditures through escalating debt is a mirage. It is a false reality and confuses Band Aids with cures as people chase after unrealistic expectations with child-like false hope. Serious fiscal changes– born of necessity–will force better policy and better behavior, and eventually a true and earned economic revival.

Source: USA Today

Danielle was a guest today with Kerry Lutz on the Financial Survival Network talking about recent trends in the world economy and markets. You can listen to an audio clip of the interview here.