Investment Contrarians

32 Days: Countdown to the Fiscal Cliff

By for Investment Contrarians |

Countdown to the Fiscal CliffThere were two winners of the Powerball lottery jackpot of $588 million Wednesday night. I was wondering if there was any chance they could help out with paying down some of the country’s burgeoning $16.2 trillion in national debt, its out-of-control deficit, and its runaway spending. Hey, isn’t that what the fiscal cliff is all about?

With 32 days remaining in the year to resolve this financial crisis, President Barack Obama and Republican House Speaker John Boehner are hard at it, trying to come to a compromise.

The reality is that, like many of you, I’m growing weary of hearing the “FC” term: financial crisis. Let’s just deal with the financial crisis stalemate and work out a deal that makes both parties happy, and slows down the frivolous printing of money that has allowed America to spend endlessly and create the financial crisis that is now lurking.

When I think about it, the government is operating a Ponzi scheme. They’re printing money and using it to pay for the undisciplined spending; when the money runs out and payments are due, they go out and print more money to cover them, and so on. This Ponzi scheme must be halted.

Just take a look at the market action. We are seeing a ridiculous number of U.S. companies declaring “special dividends” to try to help investors avoid higher dividend taxes in 2013 if the fiscal cliff is allowed to move forward.

From the end of September to mid-November, Bloomberg reports that 59 companies belonging to the Russell 3000 Index announced special cash dividends, versus 15 companies in the same timeframe in 2011. (“Special Dividends Surge Fourfold as U.S. Tax Increase Looms,” Bloomberg Businessweek, November 19, 2102.) The move to initiate special dividends is not a surprise, and I expect the payments to continue over the next few weeks unless a deal is struck.

Assuming the fiscal cliff and financial crisis are coming, as an investor, you want to try to receive some dividend income this year at the lower tax rates.

We are also seeing a rise in profit taking, as investors dump their profits now and avoid what will likely be higher taxes on capital gains and investments going into 2013.

The fact is that we are at a standstill. A financial crisis may be at stake; yet President Obama must also make sure he deals with the massive debt load, which is only getting bigger.

If you take a look at the financial crisis in Spain, Portugal, and Greece, you’ll realize that there must also be some austerity measures implemented in America; otherwise, the country will risk the longer-term effects of a financially crippled country that would be left with little flexibility to pursue programs to grow. In other words, to avert a financial crisis, the country will have to endure some short-term pain for long-term gains.

Something must be done now, but Obama must gingerly balance spending cuts and tax increases, given the economic recovery and the need to avoid a financial crisis or another recession like the eurozone.

The reality is that a resolution needs to be ironed out regarding the fiscal cliff. Don’t be surprised to see more aggressive spending cuts over the next four years, as President Obama will probably want to leave office with a much lower debt load. There will be unpopular decisions that need to be made to avert a financial crisis and save the country.

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