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The "Fiscal Cliff" and Your Portfolio

Economy Tax

If you’re anything like me, you probably want to throw a brick through the window the next time you hear the financial media yapping on and on about the so-called “Fiscal Cliff.”

What is the Fiscal Cliff?

It’s an anticipated hit to the US economy based on the following changes in 2013:

  • Expiration of the so-called “Bush Tax Cuts”
  • Automatic spending reductions as a result of the Budget Control Act (BCA) of 2011
  • Expiration of the Payroll Tax Holiday (over 2011-2012, workers have paid 4.2% into social security instead of the normal 6.2%)
  • Expiration of Emergency Unemployment Benefits
  • Expiration of the Patch to the Alternative Minimum Tax (AMT)
  • Reduction in Medicare Reimbursement Rates
  • Expiration of various other tax provisions
  • New Affordable Care Act (ACA) taxes starting in 2013

Those are a lot of changes and, if they all occur as scheduled, would without a doubt cause a significant hit to our economy. But what’s the likelihood of that? 

First, the term “Fiscal Cliff” is really a misnomer…it’s more like a “Fiscal Slope.” In other words, when we raise our glasses to toast the new year, the full impact of these changes won’t suddenly be felt when the clock strikes midnight. Many of these provisions have a phased implementation.

Second, while Republicans and Democrats are currently engaged in a political game of chicken, what’s the likelihood that they’ll simply let all of these get implemented without modification or further kicking the can down the road? Not very likely. 

You may have heard me say before: “Human nature has no taste for pain or patience…and government is nothing more than collective human nature.” Though our country needs to go through a financial cleansing, our leaders have been unwilling to let that happen and I don’t see that changing now.

So while the media is preoccupied with the Fiscal Cliff, I’m paying much more attention to the slowdown in US corporate profits, slowing of the global economy, continued fragility of the global financial system, and geopolitical tensions in the middle east and far east. These likely have greater potential to trigger a healthy pullback in stock markets than the US Fiscal Cliff. 

Most of my advisory client portfolios are defensively positioned with very little exposure to common stocks at this time. Of course, that doesn’t mean they won’t dip a bit if negative developments also affect precious metals and certain bond categories. But we are well-positioned to weather any significant downturn in stocks and, in such a situation, to use cash to buy good investments at better prices than today.