First things first – absolutely nothing has been solved with recent Congressional action regarding the farce called the “fiscal cliff.” The so called cliff has not been averted, the fiscal standing of the United States has not improved, and the Market is not better off.—Fact.
To demonstrate one of the great hypocrisies of our time, Congress raised taxes on nearly 80% of all working individuals and named the new law the American Taxpayer Relief Act of 2012 – and then Wall Street applauded the Congressional fleecing by sending stocks higher: the Dow Average jumped 2.5% in the first four days of the New Year. The 15-51 strength Indicator showed more sanity, improving by a paltry .5%.
The largest tax hike in American history was named the Affordable Care Act, which after Supreme Court approval in June 2012, begins in large effect in 2014. The new taxes provided in the Tax Relief Act are layered on top of it. In short: the earnings of American taxpayers – Consumers one and all – are under siege! And that’s not good for Markets.
Add to this mass layoffs that continue to plague the environment, most recently troubled Citigroup announced the layoff of another 11,000 employees. Job growth remains dismal, and the employment rate persists stubbornly at 7.8% – with 20 million people still unable to find work. Pressure to Consumer income has no choice but to negatively affect Markets and stock prices over the next several years. Despite this, stock valuations continue to rise.
By all indications the 2012 holiday shopping season was weaker than expected. But “the market” has not considered the data. After all, it has been distracted by the nonsense surrounding the “fiscal cliff.” This, not to mention, that earnings season is still a few weeks away. Ditto for the release of 4th quarter GDP figures. As is usually the case with Wall Street, out of sight is out of mind. They live in the moment – and try to profit from every second of it. That’s their game. That’s the business of investment banking.
Speaking of banks, they can expect to continue receiving extraordinary amounts of newly printed cash via quantitative easing (QE) from the Fed for the foreseeable future. Lower prices, driven mostly by lower fuel costs, have provided Ben Bernanke and his easy money allies plenty of room to keep printing new money. They give this new currency to banks for distribution – nowadays, these banks are all investment banks. (See: De-Institutionalize) In other words, QE provides investment banks with fresh new cash every month from the nation’s central bank (a.k.a. Federal Reserve.)
And what do you think they do with it?
That’s right, they invest it. That increased demand helps raise stock prices. That’s called stock market inflation, not growth! And that’s what you’re seeing right now in the stock market.
Again, the economy isn’t growing nearly what it needs to in order to support its massively expanding government debt and obligations. To value the Dow this high up in the action zone is to value it as if some kind of economic boom is underway. So not the case. This is a new money rally with a blinds eye toward reality. It’s not Real. It’s inflation.
By all accounts the tax raise called the American Taxpayer Relief Act of 2012 will generate less than $40 billion of annual tax revenue. Currently, and well into the foreseeable future, the federal government has an annual deficit of approximately $1.5 trillion. In that regard, forty billion of additional tax revenue doesn’t amount to a pimple on an elephant’s ass. Pardon my French.
And don’t you find it ironic that both Parties are looking to cut Medicare and Medicaid one year before the Affordable Care Act (ACA) takes effect? Remember, the ACA drastically expands Medicaid. Today’s budget cuts shrink a government program that has yet to begin.
That’s your government working hard for you.
And that’s what Wall Street is applauding.
The new money rally is not sustainable – just like unprecedented government spending and mounting national debt. A fiscal cliff is inevitable and unavoidable. When is the only question.
That debate, and an effort focused on correcting the real problems of government spending and national debt, should begin in Congress on Monday, January 7, 2013 at the very latest. President Obama has already started it, willing to exchange dollar-for-dollar spending cuts for every new tax imposed on wealthy individuals and small business.—But wasn’t the tax issue just resolved!?!
The fiscal cliff is alive and well – and so is government incompetence.
Caution to investors that think the critical fiscal issue has been resolved – and to those that buy into these stock market valuations.
Stay tuned…