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With much of the investing public presently focused on the doom and gloom aspects of the fiscal...
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Friday, October 12, 2012, 7:32 PM ETWith much of the investing public presently focused on the doom and gloom aspects of the fiscal cliff, little attention is being paid to the upside if the situation actually gets resolved. BofA Merrill Lynch has a name for what will come, calling it the "Great Rotation" — a move out of bonds and into stocks triggered in part by a resolution of the crisis at some point in 2013.
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This news story has 23 comments:
Fait accompli, the gov't juggernaut is marching onto the $20T mark, the next step.
Folks,mark my word here. One year later, on October 1, 2013, the debt will be $17T. On October 1, 2013 I will come back here to claim my prediction.
Easy bet, easy win!
You think the Greeks can riot. What if we have every city in a riot? It's a coming if we don't get our act together.
Cherry picking is fun but a fantasy.
There's been a rotation, all right, and it's worked like this. The central bankers have printed trillions of fresh dollars and used them to purchase bonds, driving up their nominal (but not real) prices. Economic actors have dumped their bonds and instead chosen to own mostly gold. Stocks have not enjoyed the same sort of direct official support, but their less rapidly declining dividends have allowed them to hold their own relative to bonds just the same. So the true meaning of the rotation is clear, then: rational investors, having rejected the dollar and government debt, have moved the capital they never intended to place at risk out of bonds, where they realised that it was now very much at risk, and into gold where it is not. There is no confidence in the decaying political and financial regime, and without confidence there is little appetite for stocks or other investment. We are reduced to waiting for this tired regime to implode, at which point it will be time to load up on equities and invest in a new America. But no one can say when that moment will arrive.
That's the tale of the tape. The rotation out of bonds has largely run its course already; most of them are now held by noneconomic actors who will not sell them in any case. Stocks hold promise that will someday be unlocked by regime change. You will lose less money owning stocks than bonds at this point, but unless that dramatic moment of change arrives fairly soon, at best you will pay too much for too little. Gold and wait is where we are, with modest investment in dividend-paying stocks if you feel like rolling the dice on the now-overwhelming political risks that dominate the economic landscape. It's a sad, dull place with no profits to be had and little to do but hope for a better tomorrow.
OK.
So, how dreadful is this cliff? According to the Congressional Budget Office, it would cut the budget deficit in fiscal 2013 by about $560 billion. That sounds like a lot, but during fiscal 2012, which just ended, US gross national debt jumped by $1.322 trillion—to end up at $16.159 trillion. So, if 2013 looks like 2012, the fiscal cliff would cut the deficit by 42%. But it would still leave a huge $762-billion hole. And gross national debt would break the $17 trillion mark.