Who’s Afraid of a Fiscal Cliff?

November 21, 2012

  • Snoozing through the fiscal cliff: Americans prove themselves smart enough to tune out the media noise, while Barry Ritholtz identifies five other factors moving the market right now
  • “Probably, this will end badly”: author Nathan Lewis on how Congress will step back from the fiscal cliff, while leaving the real problems to fester
  • “Something has to give”: mainstream echoes of Dan Amoss’ Japanese warning
  • If it were a country, this disease would be the world’s 18th-largest economy
  • How government regulation raises the price of your Thanksgiving dinner
  • If at first you don’t secede, write a letter to The 5 

 We cast our gaze toward Thanksgiving Day tomorrow, thankful to see a majority of Americans — OK, a majority of people responding to a thoroughly unscientific Yahoo Finance poll — tuning out the “fiscal cliff”…


Golly, you could hardly tell if you immerse yourself in the financial media. “The nonstop fiscal cliff paranoia continues unabated,” writes money manager and Vancouver fave Barry Ritholtz. “Apparently, it is the ONLY THING that matters to the markets. Every twist and turn in the negotiations is crucial to the future of the Republic.”

“It behooves investors to consider what else is driving equity markets,” Mr. Ritholtz gently suggests. “I can think of at least five factors:

1) Earnings are the weakest in 3 years

2) Portfolios have been poorly positioned for higher capital gains and dividend taxes

3) Europe crisis unresolved, and getting worse

4) The 17% rally in first 3 quarters had markets ahead of themselves

5) The decreasing impact of Federal Reserve QE.

“The fiscal cliff amounts to about $600 billion in friction spread out over the course of 12 months,” he says. “Fair estimates are that it will cost about 0.50% off of GDP, now estimated to be about 2.0% for the calendar year 2013.

“I submit that these other factors weigh at least as much, if not more, in the market’s current action.”

The major U.S. stock indexes are inching up this morning. The Dow has pushed above 12,800.

For the few traders on duty today, factor 3) above is in view: Eurozone ministers failed to come to terms overnight on Greece’s next bailout payment. “We discussed the issue very intensively, but since the questions are so complicated we didn’t come to a final agreement,” says German finance minister Wolfgang Schauble.

Another meeting is scheduled Monday: EverBank’s currency guru Chuck Butler isn’t holding his breath. “After a period of somewhat calm, the risk fears are returning to the eurozone. And that will weigh heavily on the euro, just like it did earlier this year.” The euro has retreated to $1.28. The dollar index sits at 80.9.

Elsewhere first-time unemployment claims dropped (dramatically) to 410,000 from an upward-revised (dramatically) 451,000. Bloomberg, citing a Market News International report, says the Labor Department “has no handle on the magnitude or duration” of the effects from Hurricane Sandy. Sounds about right.

Crude has firmed a bit to $87.51. Precious metals are in retreat, gold at $1,724, silver at $33 on the nose.

  “Probably nothing good will happen in the discussions surrounding the ‘fiscal cliff’ in January 2013,” writes Nathan Lewis.

Mr. Lewis, who oversees a private investment partnership and wrote Gold: The Once and Future Money (with a foreword by Addison), offers one of the few worthwhile fiscal cliff insights in a recent post at Forbes.

“Federal spending is almost impossible to cut meaningfully,” he writes, “because most of it is ‘mandatory’ entitlements. The remainder of federal government spending consists of other welfare programs (hard to reduce in the midst of persistent unemployment), defense (which Republicans won’t want to cut unless they get some big cuts in welfare and entitlements), corporate subsidy and Big Bird.

“The result is likely near-stasis on spending, and, despite Republicans’ efforts to the contrary, some tax rate increases. This is the ‘austerity’ approach that is not working at all in Europe…

“Deficits will likely continue and perhaps get even larger. The economy will deteriorate, while the rest of the world slips into its own recession.”

Enter the Federal Reserve, which in all likelihood will step up QEternity on Dec. 12, turning Operation Twist into full-on monetization of government debt. “Thus,” Lewis writes, “the Federal Reserve would be buying $85 billion per month of Treasuries and MBS, financed with the printing press. That is $1,020 billion per year, not coincidentally about the expected amount of the Federal budget deficit…

“Probably, this will end badly. Next year might be quite exciting.”

[Ed. Note: It’s within Congress’ power to fix the “fiscal cliff” by taking one simple step. Addison turns to Mr. Lewis for unique insights in the next issue of Apogee Advisory. Also in the issue: a “magic button” you can use to double your retirement nest egg in as little as seven years.

The issue comes out later today. Not a subscriber yet? You can become one here.]

100  “The smart money,” writes UPI editor emeritus Martin Walker “is switching focus to Japan” and away from the fiscal cliff: Japan, he says, “could be gestating the next global disaster.”

We hinted at this looming disaster the day before Election Day. Now the outer edges of the mainstream are picking up on it: Walker cites Japan’s shrinking GDP, a mass recall at Toyota and the cash crunch at Japan’s once-mighty electronics giants.

“Japan is the most indebted nation on Earth,” Walker writes, “with debt above 225% of GDP. This year’s budget deficit will be at least $480 billion. Despite interest rates running at almost zero, Japan has been able to finance its gargantuan debt because Japanese savers loyally buy it.

“But how long can they afford to do so? Japanese used to be among the world’s most thrifty savers. But over the last five years, household savings are running at less than 2% of disposable income, less than half the already low U.S. level.

“Traditionally,” Walker goes on, “Japan has been able to finance its debt because of its massive trade surpluses from its formidable export machine and from interest payments on Japan’s investments overseas. But both of those sources of funds are drying up.” Indeed, Japan now runs a trade deficit.

“Something has to give,” he concludes, echoing the warnings of our own Dan Amoss on Nov. 5: “Either the yen weakens sharply or the government slashes spending and cuts the deficit or Japan has to raise its interest rates. Each of these options carries serious problems for the global economy.”

 “Where’s the girl who was sitting next to you?” Donald Warzenski asked across the dinner table about his daughter.
“Celebrating Thanksgiving With ‘Generation Alzheimer’s,'” reads the concerning CNN headline.

An estimated 10 million baby boomers will develop Alzheimer’s. One in two will acquire it past the age of 85. And on the global front, according to Alzheimer’s Disease International, there are 7.7 million new cases worldwide each year. To try to quell Alzheimer-related accidents, Tipp Toes is releasing GPS shoes for patients in the U.K. and Ireland.

 And the costs are as chronic as the disease.
“If dementia were a country,” Alzheimer’s Disease International writes, “it would be the world’s 18th largest economy, ranking between Turkey and Indonesia. If dementia care were a company, it would be the largest by annual revenue, exceeding Wal-Mart ($414 billion) and Exxon Mobil ($311 billion).”


Thousands of scientists around the world are champing at the bit to find the cure. The ones who do will dominate this multibillion-dollar market.

Astute 5-ers already know Patrick Cox has found one amazing little company that’s picked up the ball Big Pharma lazily dropped a while ago. What you might not be aware of: Now is your last chance to take advantage of their promising discoveries.

“It could have earth-quaking implications,” Patrick writes, “for patients, for science, for investors. That’s why you need to be safely ‘on the inside’ BEFORE midnight, Friday, Nov. 23…

  Annual Turkey Day Inflation Report: Last year, we reported a 13% annual increase in the price of Thanksgiving dinner for 10 people.

Despite one of the worst droughts in decades, the American Farm Bureau Federation says the cost of a Thanksgiving dinner rose to $50.99 from $49.38 last year, or a much smaller 3% increase.

“I’m not terribly surprised by this result,” the organization’s chief economist John Anderson says: Since Thanksgiving pricing decisions happen often well ahead of time, the drought will have a delayed effect, likely to lighten our wallets in the next three-six months.

 “This year’s Thanksgiving dinner will be the most expensive ever,” counters commodity analyst Dave Juday of the Juday Group.
“For that,” Mr. Juday continues, “much of the thanks can be given to ethanol — which continues to divert grain from food to fuel.”

As most 5-ers are aware, an ethanol mandate went into place in 2007 directing more corn into ethanol production than into livestock feed (You might recall our notice in September of farmers feeding cows salvage candy and taco shells because they couldn’t afford feed.)

Because of this year’s drought, a coalition of livestock producers and governors asked that the mandate be waived to lessen the impact on corn prices. “We now have about one-third less of the corn that we need to adequately supply animal feed, ethanol, exports and sufficient carry-over levels,” the coalition claimed.

“Less than one week before Thanksgiving, however,” Juday writes, “the Obama administration denied that request.

For the future, Juday concludes this means, “anything short of a record crop would still leave a grain shortage and high feed — and food — prices.”

 “To secede,” writes the first of several emails on the subject of secession, “these states must meet and beat the United States military? No other way out.
“Washington isn’t just going to let Texas separate. Can you fill in the blanks?”

 “True; we shouldn’t have to ask permission for what’s already been given through the Declaration of Independence,” writes another in reply to an offhand remark we made last week about the irony of asking to secede on a White House website.
“But then again,” the reader says, “we shouldn’t have to fear that we may be imprisoned for _________________ (fill in the blank; there are no wrong answers. Really, go ahead — first thing that comes to your mind).

“That is how it is these days. [The petitions] may just wake the zombified legislators from their cliffhanging stupor.”

 “The deal is,” says another succinctly, “thousands of people have expressed their assessment of Mordor-on-the-Potomac.”


2 “Forget this secession — total BS nonsense,” a reader demurs. We will spare you the all caps and underlining that follows.

“What is needed is a limited constitutional convention called by the 38 states making all the noise right now to amend the Constitution outlawing federal deficit spending.

“Granted we’ll get a three-year depression, but we need to bite the bullet, take the hard medicine and once we come out the other end of all this trouble, look out for the USA, baby.”

2 “I used to think it would be a great idea for Texas to ‘go it alone,’ but not anymore,” writes a small business owner from Texas with a cautionary tale.

“Last year, our major customer decided it no longer wanted to do business with us, and also not to have to pay us. They were located in Oklahoma and are a multibillion-dollar company. Needless to say, they stomped the crap out of this ‘Old Texas Boy’ and the best I could do was get a 50% settlement out of them, close down the business and start over.

“Now a year later, the state of Texas has decided to audit this old business for sales tax filings. For four years starting in 2008! Since the new rules passed by the Texas pigislature a couple of years ago, even though our agreement with this multibillion-dollar company was that they were responsible for assessing taxes, since they had a presence in every state and we didn’t, the state assumes we’re liable to pay them even though we never collected any of them.

“So now a closed company that was forced out of business is on the hook for over $2 million in unpaid state taxes. To cap it off, under the new rules passed by the pigislature, the auditor’s initial determination is deemed correct and enforceable and I have to take the state to court to fight against the assessment! Also, the state can make the case that since I started a new similar- business after closing the old one, that the new business entity is also be liable as a survivor of the old one. What was I supposed to do, start a knitting shop? This is what I know how to do. If I start a new business, it will be doing something I know about!

“And the big boys located in the other state? They are too hard to go after, so the state decided it is more economical to come after me first. Of course, the state auditor says I can just invoice the customer for the taxes owed — yeah, right, the same guys that already didn’t pay me? That I was forced to sign a waiver of my rights to sue them with in order to get a settlement through arbitration?

“To cap everything else off, since I knowingly neglected to collect the taxes (yes, in writing, no less), the state can also try to make the case that it was fraudulent negligence, which means I’m personally liable. It doesn’t matter that I had an agreement with the customer. My attorney says I’m not allowed to dispose of any property or make any transaction without prior approval because the state will assume I am trying to move assets fraudulently and then my guilt under the new fraudulent statutes is automatically determined and all corporate protection is waived, since it is now considered a criminal activity.

“So now I have to petition the state to sell property in order to fund a legal defense to fight the state. What happens if they say no? My attorney says it’s very unlikely, but of course, I have to pay him in advance!

“And this is Texas, boys and girls. Where they have now hired several hundred private contractor consultants to be auditors because the state ones were overworked!

“If I can get this resolved with any assets left, I’m outta here!”

The 5: Ouch… Good luck.

2 Lest we leave you on a downer before Thanksgiving, here’s a path to a freer world that doesn’t necessarily entail secession. (Thanks to Jeffrey Tucker at Laissez Faire Books for passing along the link.)


Happy Thanksgiving,

Dave Gonigam

The 5 Min. Forecast

P.S. This is our final chance to remind you in The 5 that discounted access to Patrick Cox’s groundbreaking and potentially lucrative Alzheimer’s research comes off the table Friday at midnight. Details here.

P.P.S. U.S. markets are closed tomorrow and will trade during an abbreviated session on Friday. The 5 returns on Monday.


“This country was born through secession,” Rep. Ron Paul wrote this week, pointing out what might be obvious to you, but not to many others. “Some thought it was treasonous to secede from England, but those ‘traitors’ became our country’s greatest patriots.”

One year ago, on the day before Thanksgiving, we published Jeffrey Tucker’s review of The Idea of America – a collection of essays spanning from Jefferson to Emerson to Mencken to Rothbard. The review is as timely now as it was then. The essays in the book are timeless. With our best wishes and food for thought on Thanksgiving, enjoy.


The Idea of America

reviewed by Jeffrey Tucker

There are occasions in American life — and they come too often these days — when you want to scream: “What the heck has happened to this country?!” Everyone encounters events that strike a particular nerve, some egregious violations of the norms for a free country that cut very deeply and personally.

We wonder: Do we even remember what it means to be free? If not — and I think not — The Idea of America: What It Was and How It Was Lost, a collection of bracing reminders from our past, as edited by William Bonner and Pierre Lemieux, is the essential book of our time.

I’ll just mention two outrages that occur first to me. In the last six months, I came back to the country twice from international travel, once by plane and once by car. The car scene shocked me. The lines were ridiculously long, and border control agents, clad in dark glasses and boots and wearing enough weaponry to fight an invading army, ran up and down the lines with large dogs. Periodically, U.S. border control would throw open doors of cars and vans and let the dogs run through, while the driver sat there poker-faced and trying to stay calm and pretending not to object.

When I finally got to the customs window, I was questioned — not like a citizen of the country, but like a likely terrorist. The agent wanted to know everything about me: home, work, where I had been and why, whether I would stay somewhere before getting to my destination, family composition and other matters that just creeped me out. I realized, immediately, that there was no question he could ask me that I could refuse to answer, and I had to do this politely.

That’s power.

The second time I entered the country was by plane, and there were two full re-scans of bags on the way in, in addition to the passport check, and a long round of questioning. There were no running dogs this time; the passengers were the dogs, and we were all on the agents’ leashes. Whatever they ordered us to do, we did, no matter how irrational. We moved here and there in lock step and total silence. One step out of line, and you are guaranteed to be yelled at. At one point, an armed agent began to talk loudly and with a sense of ridicule about the clothes I was wearing, and went out of his way to make sure everyone else heard him. I could do nothing but smile as if I were being complimented by a friend.

That’s power.

Of course, these cases are nothing like the reports you hear almost daily about the abuse and outrages from domestic travel, which now, routinely, requires everyone to submit to digital strip searches. We have come to expect this. We can hardly escape the presence of the police in our lives. I vaguely remember, when I was young, that I thought of the police as servants of the people. Now their presence strikes fear in the heart, and they are everywhere, always operating under the presumption that they have total power, and you and I have absolutely none.

You hear slogans about the “land of the free,” and we still sing patriotic songs at the ballpark — and even at church on Sunday — and these songs are always about our blessed liberty, the battles of our ancestors against tyranny, the special love of liberty that animates our heritage and national self-identity. The contrast with reality grows more stark by the day.

And it isn’t just about our personal liberty and our freedom to move about with a sense that we are exercising our rights. It hits us in the economic realm, where no goods or services change hands that aren’t subject to the total control of the leviathan state. No business is really safe from being bludgeoned by legislatures, regulators and the tax police, while objecting makes you only more of a target.

Few dare say it publicly: America has become a police state. All the signs are in place, among which the world’s largest prison population. If we are not a police state, one must ask: What are the indicators that will tell us that we’ve crossed the line? What are signs we haven’t yet seen?

We can debate all day about when, precisely, the descent began, but there can be no doubt when the slide into the despotic abyss became precipitous. It was after the terrorists hit on Sept. 11 in 2001. The terrorists wanted to deliver a blow to freedom. Our national leaders swore the terrorists would never win, and then spent the following 10 years delivering relentless and massive blows to liberty as we had known it.

The decline has been fast, but not fast enough for people to be as shocked as they should be. Freedom is a state of being that is difficult to recall once it is gone. We adapt to the new reality the way people adapt to degenerative diseases, grateful for slight respites from pain and completely despairing of ever feeling healthy and well again.

What’s more, all the time we spend obeying, complying and pretending to be malleable — in order to stay out of trouble — ends up socializing us, and even changing our outlook on life. As in the Orwell novel, we have adjusted to government control as the new normal. The loudspeakers blared that all of this is in the interest of our security and well-being. These people who are stripping us, robbing us, humiliating us, impoverishing us are doing it all for our own good. We never fully believe it, but the message still affects our outlook.

The editors of The Idea of America are urging a serious national self-assessment. They argue that freedom is the only theme that fully and truly animates the traditional American spirit. We are not united in religion, race or creed, but we do have this wonderful history of rebellion against power in favor of human rights and freedom from tyranny. For this reason, the book begins with the essential founding documents, which, if taken seriously, make a case for radical freedom not as something granted by government, but as something that we possess as a matter of right.

The love of liberty is rooted in our Colonial past, and it is thrilling to see Murray Rothbard’s excellent account of the pre-revolutionary past printed here, with follow-ups to make the point by Patrick Henry and Thomas Paine. Lord Acton makes the next appearance with a clarifying essay about the whole point of the American Revolution, which was not independence as such, but liberty. He forcefully argues that the right of secession, the right to annul laws, the right to say no to the tyrant, the right to leave the system, constitute great contribution of America to political history. As you read, you wonder where these voices are today and what would happen to them if they spoke up in modern versions of the same thoughts. These revolutionaries are pushing ideas that the modern regime seeks to bury, and even criminalize.

The voice of the new country and its voluntaristic themes is provided by Alexis de Tocqueville, along with the writings of James Madison. As Bonner and Lemieux argue in their own contributions, the idea of anarchism, that is, living without a state, has always been just beneath the surface of American ideology. Here, they bring it to the surface with an essay by proto-anarchist J. Hector St. John de Crevecoeur, who said of America, “We have no princes for whom we toil, starve and bleed: We are the most perfect society now existing in the world.”

The anarchist strain continues with marvelous writings by Thomas Jefferson, Henry David Thoreau, Voltairine de Cleyre, plus some court decisions reinforcing gun rights. The book ends with another reminder that American is an open society that is welcoming to newcomers. The final choice of Rose Wilder Lane’s “Give Me Liberty” is inspired.

The value of this book is dramatically heightened by the additional material from Bonner, whose clear prose and incisive intellect is on display here, both in the foreword and the afterword, as well as Lemieux, whose introduction made my blood boil with all his examples of government gone mad in our time. Bonner in particular offers an intriguing possibility that the future of the true America has nothing to do with geography; it exists where the free minds and free hearts exist. The digitization of the world opens up new opportunities for just this.

The contrast is stark: what America was meant to be and what it has become. It can be painful to take this kind of careful look. Truly honest appraisals of this sort are rare. Adapting, going along, pretending not to notice, are all easier strategies to deal with the grim situation we face. But this is not the way America’s founders dealt with their problems. This book might inspire us to think and act more like we should.

We should prepare.

In the words of Thomas Paine:

“O ye that love mankind! Ye that dare oppose, not only the tyranny, but the tyrant, stand forth! Every spot of the Old World is overrun with oppression. Freedom hath been hunted round the globe. Asia and Africa have long expelled her. Europe regards her like a stranger, and England hath given her warning to depart. O! receive the fugitive, and prepare in time an asylum for mankind.”



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