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The election has come and gone. And while all the media focus remains on the results, the market’s focus will almost certainly immediately shift to the major hurdle to overcome this year: The Fiscal Cliff.
It’s important to remember that despite the hysterics surrounding the election results, the current Congress and President have to work together to form some sort of compromise to avoid falling over the Fiscal Cliff. At this point, however, the outlook for a deal the market will embrace is pretty slim.
In the post-election analysis and political jockeying, the core theme I want you to continually revert back to is clarity …
Markets have suffered over the past few years mainly due to a lack of clarity from Europe and China. But now it’s lack of clarity regarding our government that is holding back markets. And only our current government officials have the ability to provide clarity on taxes, military spending, and entitlements between now and the end of the year.
If they can’t, then the market will likely begin to fall … and fall hard.
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| The campaigning is over. But the Fiscal Cliff is still with us. |
Specifically, there are four areas of focus with regards to the Fiscal Cliff: Bush income tax rates, Bush era capital gains tax rates, the payroll tax cut, and massive spending cuts to entitlement programs and the military. Each of these areas needs to be addressed before they expire or automatic cuts are put in place on January 1, 2013.
The general consensus is that the government will apply some sort of a temporary fix to the Fiscal Cliff, and turn the “cliff” into more of a “hill.” Put more bluntly, they plan on kicking the can down the road yet again. But that may not work this time.
The U.S. Is Walking
on Quicksand
Ratings agencies and bond investors realize that the United States is not on a sustainable fiscal path. And everyone is getting tired of the half measures that only delay tough choices for another period (like last year’s debt ceiling deal). So if there are temporary measures passed to blunt more of the damage, we can expect that ratings agencies will again downgrade our bonds. And Treasury bond investors will begin selling, as the fiscal prospects for the U.S. turn even grimmer.
Again, what the market craves, and has craved for years, is clarity. So unless yesterday’s election brings a renewed sense of bi-partisanship and willingness to compromise, the winner of the election won’t matter all that much, at least in the immediate term. And the smart money is on further gridlock in Washington.
One way to play the continued gridlock and eventual selling of Treasury bonds that will follow it in the weeks and months ahead is via the ProShares Short 20+ Year Treasury (TBF). This ETF is designed to rise with bond yields as Treasury bond values fall.
I hope our leaders can find ways to solve the gigantic problems facing the nation. But you have to look at reality and make sure you are positioned not just for the scenario you hope to occur, but also for the scenario most likely to occur.
Best,
Tom
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