Investment Contrarians

Fiscal “Y2Cliff” Sham Held Investors Hostage in 2012

By for Investment Contrarians |

Investors Hostage in 2012On January 1, 2000, the world breathed a collective sigh of relief that the over-hyped Y2K fiasco dissipated without even a whimper after years of ballyhoo.

Some things never change.

As expected, at the last moment, Democrats and Republicans came together in joyous union and resolved the so-called fiscal cliff. Nervous investors around the world joined together with rapturous optimism and jumped back into the markets.

On January 1, 2013, the House approved the new deal by a 257 to 167 margin. The bill increases the income tax rate from 35.0% to 39.6% for individuals earning more than $400,000 a year and couples taking home more than $450,000 combined. Everyone else will continue to see income tax cuts.

None of this should be a surprise to anyone, since Obama, in his bid for re-election, said he would increase the tax rates on the wealthy, though his definition of “wealthy” has changed, climbing from earnings of $200,000 for individuals and $250,000 for families.

While both sides are unhappy about what they didn’t get, they should be unhappy about how they treated the global population.

For almost a year, inept politicians in Washington sat around, worrying about their chances for re-election; ignoring the impact the unresolved fiscal cliff was having on the international investing community and global economy.

But why put your hard-earned time and effort into resolving the fiscal cliff when you might not be re-elected? Maybe because it’s part of your job? You’d be forgiven for thinking it was otherwise. After all, during the eternal run up to the Presidential elections, the fiscal cliff wasn’t even a major talking point. President Obama said he wanted to raise taxes on the rich, but other than that…it received scant attention.

That doesn’t mean the campaign trail silence wasn’t heard around the world. If a quasi-new age Mayan doomsday scenario can send rational people into a tizzy, imagine what a real-life economic doomsday scenario could do to unpredictable investors and world leaders. Sadly, we didn’t have to imagine.

It’s tragic that politicians in Washington didn’t care what kind of impact the unresolved fiscal cliff had on the international economy. Throughout 2012, the global economy continued to struggle. Parts of Europe are in recession, so too is Japan; the U.S anticipates anemic growth in 2013, and China is expecting expansion to be tepid.

Granted, responsibly resolving the fiscal cliff in a reasonable timeframe would not repair the global economy. But knowing the world’s largest economy was doing something constructive would have sent a positive message.

Better late than never I suppose. Even with the fiscal cliff averted, nothing has really changed in the U.S. The national debt is still rising, and as a result, the buying power of the U.S. dollar continues to decline.

What areas of the stock markets hold promise for investors? Precious metals like gold, silver, and platinum should continue to be an attractive avenue for those looking for hard assets.

If you don’t want to hedge against the U.S. dollar with gold, silver, or other precious metals, you could consider inverse exchange-traded funds (ETFs) that short the U.S. dollar. Because the U.S. dollar is weakening against many foreign currencies, other stronger nations will see their currencies increase in value.

The PowerShares DB US Dollar Index Bearish (NYSEArca/UDN) tracks the performance of the Deutsche Bank Short US Dollar Index and gives investors a cost-effective way to capitalize on the fall of the U.S. dollar.

The index that the PowerShares fund follows is based on six currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It currently trades near $27.20 and has an average three-month volume of more than 62,000 units. The fund’s net asset value is approximately $97.5 million.

While the markets have responded positively to the fiscal cliff deal, the question is: how long will the rally last? When the fiscal cliff steps out of the spotlight, we’ll see that the real underlying issues affecting the stock market are the global economy and its impact on corporate earnings.

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