By Charles Biderman
There is no way sustainable economic growth is at all possible in the United States, Europe and Japan over the near term under current government policies of providing citizens with all sorts of economically unfeasible cradle-to-grave entitlement programs. And without sustainable growth there is no way stock prices will remain as high as they are for very much longer.
However, I am long term bullish on the global economy. The short and medium term problem is that the present governments and the voters who put them into office are unwilling or too ignorant to accept the simple reality that you can't get something for nothing.
That brings me to the fiscal cliff. It now seems as if most of Wall Street believes that any sort of deal will save the market from collapse. Even if the deal is to kick the can down the road a few months. This is magical thinking.
If there is a deal, what kind of deal is even possible? At best, I expect the 2% payroll tax cut will be eliminated and that will reduce US after tax income by $100 billion compared with this year. How much more will after tax income go down as taxes go up as a result of a deal? Some. But who knows? If there is no deal taxes could go up by $500 billion.
Look at it this way. After tax income will grow about $200 to $250 billion this year compared with last year. If taxes go up by $500 billion next year, after tax income will decline by $250 to $300 billion, a drop of as much as 4% from this year's take home pay. My definition of a recession is a year over year drop in after tax income and 3% to 4% drop is big.
Meanwhile CNBC keeps running these Rise Above infomercials that are truly a joke. Today's was if we go off the fiscal cliff, cutting healthcare by $490 million would mean no cancer screenings for 33,000 women. Do you think CNBC realizes that number means it costs $15,000 for a cancer screening? Why is nobody on CNBC questioning how much the government wastes when providing services?
Another joke, NY Times nitwit Paul Krugman says government deficits do not matter because bond buyers have not stopped buying bonds. But what happens if something totally unexpected happens. What happens to bond buying if interest rates surge. Now I know no one believes interest rates will surge anytime soon. And yes, I know California single family home prices will never go down and the Nasdaq should still be at 5000.
Imagine, if interest rates surge to 10%. Interest on the $16 trillion federal debt would spike to $1.6 trillion. Compare that $1.6 trillion potential interest expense with total current US revenues of $2.5 trillion? Not much less.
Paul Krugman is supposed to be an economist. He should know that only God can prophesize interest rates. If interest rates do shockingly surge, will bond buyers still be lining up to buy US government, Paul?
I started today by saying I am long term bullish. Right now Biderman's Market Picks model portfolio is short four ETFs, Europe (EFZ) the Euro (EUO), the big banks (SEF) and the emerging markets (EUM); after the next market plunge, I will add to model portfolio longs by buying more Apple (AAPL), Amazon.com (AMZN), TrimTabs Float Shrink ETF (TTFS), Salesforce.com (CRM)
And of course in today's money printing world, the model portfolio's largest holding is gold. I recommend buying one ounce gold bars from a reputable dealer as close to spot as possible.