The equity markets are soaring to new highs following the Fiscal Cliff deal reached recently in Washington, which continues to raise the debt and kick the can down the road. We called the rally back in October of 2011, but right now we are extremely cautious as the rally may be overextended especially in housing (NYSEARCA:XHB) and financials (NYSEARCA:XLF).
The Fiscal Cliff deal is just what we expected a few months ago...a conciliatory deal that will delay the inevitable debt collapse for the time being.
Immediately, after the bill was passed by the House, Obama went back on his multi-million dollar vacation to Hawaii after signing an executive order to increase pay for Washington politicians.
The U.S. government is broke, yet the politicians are living "la dolce vita" on the tab of the minority of Americans who actually work and pay taxes.
One of the highlights of the new deal is an extension of the costly unemployment benefits. Maybe if the extensions were done away with more Americans would actually get back to work?
The world will begin to wise up and realize that the gold (NYSEARCA:GDXJ), silver (SIL), uranium (NYSEARCA:URA) and critical metal (NYSEARCA:REMX) miners may be the safest place to be as the U.S. is rapidly losing its status as an economic juggernaut. (click to enlarge)
The dollar (NYSEARCA:UUP) and Treasuries (NYSEARCA:TLT) are reversing lower and may hit critical new lows. Investors are selling the dollar and U.S. bonds for risk on assets such as commodities and equities. This may cause a spike in interest rates. Higher interest rates, unemployment rate and a declining dollar could especially hurt the overextended housing and financial sector which has had a major boost from government interventions.
The long-term bond ETF is breaking below the 200 day moving average. We called the top this summer. See article predicting top in Treasuries titled, "A Major Turning Point For Gold, Silver and U.S. Treasuries".
We may be in the beginning of a hyper-inflationary rally where interest rates could begin soaring and the dollar could hit new lows. This could cause another decline in the housing market and put pressure on banks. There is plenty of cash on the sidelines who may be seeking alternatives in the form of the undervalued commodities (NYSEARCA:DBC) and miners (NYSEARCA:GDX) especially as the dollar is forming a bearish head and shoulders formation and the Canadian Venture is breaking out above the 50 day moving average.
The bill to avert the Fiscal Cliff did not include any meaningful cuts to entitlements, while taxes went up significantly. This does not sound like ingredients for an economic recovery. Do not be surprised with rising interest rates if the inflated housing and financial market turn down with further credit downgrades.
Instead, one should consider using this rally to sell overvalued U.S. equities- especially U.S. banks and housing- and diversify into the undervalued miners who appear to be bottoming and making positive technical reversals.