You may not be surprised to see another article about the U.S.
fiscal cliff. In fact, you might be tired of it, as exhausted as
the analysts bombarded by incessant talk about Greece and the
euro.
But turning a blind eye won't stop it from coming, and there is
no investment guru that hasn't heard about it at this point.
A quick search of "fiscal cliff" in GuruFocus yields nine - only
nine
- posts that make at least a slight reference to it, of which I
found three to be reminders of what is to come.
Jim Rogers had this to say about it (all emphases mine):
"The United States is
the largest debtor nation
in the history of the world. Our debts are skyrocketing every
year and
nobody's doing anything about it
. Every country in history that's gotten into this situation has
had a crisis or a semi-crisis, or both. In 2002 we had an
economic slowdown, which was fairly serious, and then in 2007 and
2008 we had another one, which was worse because the debt was so,
so, so much higher.
The next time around the debt is going to be that much
more catastrophic.
"
The
FPA Capital Fund's Q2 Commentary
(all emphases mine)?
"Both democrats and republicans have made clear what they
fundamentally believe needs to occur in order to reduce the
deficit, but the differences in philosophy are fairly profound.
We are skeptical that anything will be accomplished until
after the national election in November
,
and believe any resolution to the oft discussed fiscal
cliff will be deferred into 2013
. This would result in automatic spending cuts to take place in
the Department of Defense and other programs not tied to Social
Security, Medicare, Medicaid or other entitlement programs. The
so-called Bush tax cuts and other temporary tax cuts will also
expire at the end of this year. All of this fails to inspire
businesses or individuals to feel confident about the economic
outlook for this country. Unless Congress and the White House
agree to
reduce the growth of entitlement spending, enact
meaningful tax reform, and remove the regulatory burdens on
businesses
, we believe these headwinds will continue to exert downward
pressure on the growth rate of our economy."
Seeing as how I've yet to see an article directly tapping this,
last quarter the Congressional Budget Office released a paper
that details the "economic effects of reducing the fiscal
restraint that is scheduled to occur in 2013". You can find it
easily by Googling the document, and the keywords have
practically been given to you - I just gave you the title!
If you were to read the whole thing word for word, you would come
to realize (or accept) a great buying opportunity is coming:
a recession might just hit the country in 2013
H1
.
Indeed it might crop up, but only on the condition our friends in
Congress and whoever wins in the November elections do not harden
their hearts and somehow renege on the stipulations of the
sequestration imposed by the 2011 Budget Control Act without
imposing any further policy changes.
Politicians face three choices, according to the CBO.
"They could address the short-term economic challenge by
eliminating or reducing the fiscal restraint scheduled to occur
next year without imposing comparable restraint in future
years... Alternatively, they could move rapidly to address the
longer-run budgetary problem by allowing the full measure of the
fiscal restraint now embodied under current law to take effect
next year... Or... they could enact a combination of policies:
changes in taxes and spending that would widen the deficit in
2013 relative to what would occur under current law..."
Short-term hardship? Utter destruction in the long-term? Or the
idealist's favorite: the middle ground?
The sequestration as it is currently known will reduce a net $560
billion from the federal deficit between fiscal year 2012 and
fiscal year 2013, taking into account a $47 billion "economic
feedback" resulting from the subsequent strike on the economy.
CBO estimates the $607 billion
gross
reduction to come from the following sources:
With a net $560 billion being removed from the economy (and take
note this is largely ephemeral considering forecasts are
inaccurate
by design
), the CBO expects this divestiture will weaken the economy in
the second half of 2012 and "
a much larger impact... in 2013
," magnifying expected restraint in household spending and
business investments/hiring to the extent real GDP is projected
to "increase by just 0.5% next year under current law
...reflect[ing] a
contraction in output at an annual rate of 1.3% during
the first half of 2013
... then a
renewed expansion in output at an annual rate of 2.3% in
the second half of 2013
."
The CBO does not even forget to emphasize any economic forecast
is made more uncertain by the Euro Crisis and any further
developments in the US Housing market.
What I find interesting here is how the CBO - without saying it
outright - is claiming the politicians in charge of this country
won't find a way to
completely
prevent GDP contractions
short of abolishing the fiscal restraint
. Table 2 of the CBO May 2012 report flatly depicts that real GDP
will move by a range spanning a
0.4% drop
to a 3.8% growth in 2013 H1
under the alternative fiscal scenario
that "reflects a combination of changes to current law, including
changes that would maintain major policies that have been in
place for a number of years" (e.g. extension of expiring tax
provisions, indexing of AMT to inflation, and extinguishment of
the automatic spending cuts, to name a few examples).
If the pols somehow find completely and utterly remove the fiscal
restraint and return to the unsustainable status quo
without
doing anything
to reduce the fiscal deficit and the federal debt over the long
run, the CBO expects these liabilities to start rising
significantly faster than GDP thanks to the Baby Boomers and
inflation in healthcare, causing "a growing portion of people's
savings" to government debt rather than "investments in
productive capital", necessitating higher interest payments that
will
increase taxes or reduce government benefits
while
restricting
the ability to use tax and spending policies in response to Black
Swans.
Should human nature be of any indication, I find myself
concurring with FPA Capital's commentary. It's hard to forget how
the U.S. politicians squabbled over the debt ceiling dilemma last
year, only to kick the can.
Joshua Brown of The Reformed Broker has even gone so far as to
assert "there are precisely zero solutions" last week for the
simple fact that everything crushing the U.S. economy is within
budgets coddled by political interests.
The bottom line is that there's a decent chance we're going to
get knocked around next year.
I'm not saying we should forgo purchasing investments now, when
there are plenty of opportunities to be found thanks to the
volatility present in today's market environment.
I'm saying this is a cue for us to
begin
hoarding capital, just in case this recession comes to pass,
drags market prices down with it, and gives value investors the
opportunity to average down.
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