Those who root for the collapse of America think this fiscal cliff means something. It doesn’t. Well, perhaps that’s a rash statement – it could bring a hot little buying opportunity. It’s possible stock markets, after a winning 2012, could swoon like they did in the fall of 2011 when we had the last catastrophe and this blog was overrun with people begging you to buy gold at $1,900 an ounce. (It’s now $1,650.)
Remember that? It was the ‘debt ceiling crisis,’ when the fools among us said the US would default on its federal debt, triggering a systemic financial collapse and a plague of bats. It was, of course, political theatre. When the inevitable solution came, markets recovered and the economy marched on. Those who were smart enough to buy growth assets in the autumn of 2011 have seen them swell in value by about a third. Pay attention. A new gift could be coming.
With scant time left in the year it’s unlikely squabbling US politicians will cement a deal to stop robo tax hikes and spending cuts. Markets have lost ground as the deadline approaches. More significantly, the Vix – which measures volatility – has spiked. Given the big gains investors have scored in recent months, I can totally see a wave of selling that takes them off the table.
Nobody believes politicians will let the American economy fall into recession, and stay there. The tax increases and budget cuts will never hold. What markets do fear are changes to the tax code making investing less lucrative, since part of the cliff involves taxing dividends as income (bad) and raising capital gains taxes by a third (worse). Until that’s resolved, a mountain of money will stay on the sidelines.
This could mean 2011 comes back. That’s when markets were heaving by 400 points a day and the doomers among us predicted a tumbling economy leading to a banking collapse. Today the S&P is 22% higher and gold is 13% lower. US unemployment is down, corporate profits are up and American real estate has bounced off the bottom.
Look at the latest stats. Americans are buying houses again. More new deals than at any time since early 2010, when the government was paying people to make offers. Sales of new houses have just jumped to a four-year high. Bidding wars have returned to Boston, Phoenix, San Francisco and New York. As I mentioned this week, a fixer-upper townhouse in Washington just got 168 offers, and sold for $40oK over asking. Prices in Arizona are ahead 20% in a year. Mortgage rates are at rock bottom, and a jump in both jobs and consumer confidence has people thinking it’s time to pounce on houses which are 32% cheaper than in 2005.
This is exactly what I anticipated, and told you to expect. And look at business demand. New orders have jumped by the most in four months, commensurate with an increase in overall corporate profitability. In the third quarter alone US companies earned $1.75 trillion, after tax – that’s up 18.6% in a year. In the last four years corporate profits as a share of the US economy have risen by 300%.
Against these facts the people who’ve bet against America – telling you the dollar will collapse because of QE, society will disintegrate into food stamp hell, the unemployed will fill FEMA camps or the fiscal cliff is lethal – are wrong again. A recession ain’t in the cards. The American dollar will grow stronger, not weaker. And when rising inflation plus falling jobless numbers prove the Fed has printed enough money, then monetary stimulus will be withdrawn and interest rates will start their gradual ascent.
The contrast between our two countries will be fascinating. During four years of deleveraging Americans have paid off personal debt while we’ve wallowed in it. Home ownership rates there have tumbled while here they have soared. Mortgage borrowing Stateside has withered while here it’s hit one record after another. There houses dropped in value by a third. Here they rose as much. Meanwhile wage gains in both places have been similar, along with interest rates.
When it comes to risk, there’s no comparison.
In 2013 smart people will move money out of inflated Canadian real estate and into financial assets, with a growing exposure to the largest economy in the world. Next week could be a hell of a time to start.