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"Cliffs are in fashion this fall," economist Ed Yardeni writes. Not only is there the fiscal...

"Cliffs are in fashion this fall," economist Ed Yardeni writes. Not only is there the fiscal cliff, there's the political cliff and the revenue cliff. “If they fall off of it,” says Yardeni, "so will the profit margin." Which makes for an earnings cliff too. Then there's the "capital strike," described by Barclays' Barry Knapp as industry's reluctance to invest until we know the election result and whether the fiscal cliff will be averted.
Comments (40)
  • there is also a "patent cliff" for big pharma
    28 Oct 2012, 04:33 AM Reply Like
  • We already dropped off the political cliff many many years ago. Now we have to deal with the results of incompetence prevailing. It is ridiculous that we are talking about a potential fiscal cliff. What is wrong with congress and to somewhat lesser extent senate?
    28 Oct 2012, 07:47 AM Reply Like
  • Unlike Unions and other groups, capital doesn't announce when it's "on strike."
    28 Oct 2012, 08:38 AM Reply Like
  • But like unions and other groups, it frequently goes "on strike" when it thinks it isn't getting what it deserves.


    Unlike unions and other groups, it goes on strike preemptively, in an attempt to extort political figures to coddle it like the whiny little baby that it often is.
    28 Oct 2012, 08:55 AM Reply Like
  • Or it goes around saying stuff like "There's just too much uncertainty, about taxes, about regulation, etc." This happens a lot before elections.
    28 Oct 2012, 09:02 AM Reply Like
  • For the most part capital just goes someplace else. Asia is getting a lot of investment by US companies. In lieu of that companies raise prices to keep the return on capital at reasonable or growing levels. Capital needs an environment that encourages it to be gathered and used and that is where it goes.


    Cuba is an alternative model.
    28 Oct 2012, 11:50 AM Reply Like
  • TA


    I have heard it for the last 3 years. Maybe I am just listening and you are not.
    28 Oct 2012, 11:51 AM Reply Like
  • Interesting that Unions have been declining since the 1970s, tax rates to the rich have been lowered and we have rampant unemployment.


    Interesting that while the rich keep getting richer, signs of poverty are appearing everywhere....


    Then the same guys who pushed for the fairy tales of trick down say we need to be like China.....really?


    Manufacturing shoes for 16 hours per day and be paid a couple of dollars isn't wealth.....


    That's what our oligarchs want, depress our salaries so they can force us into competing for more menial jobs.....
    28 Oct 2012, 01:05 PM Reply Like
  • anon


    Unions have been declining since the 1970's and the standard of living has been increasing and our GDP is 15 times what it was in 1970. All classes are richer by comparison and our population is 50% larger.


    Let's hear some names of people who think we should be like China. I hear Obama say we need to export which is China's main business so perhaps he is leading your thinking.


    Please name the oligarchs also and where they meet so we can all show up at the next meeting.


    I can help you with your argument but I will let you think about it.
    28 Oct 2012, 01:14 PM Reply Like
  • TVP,
    Have you seen the latest reports on China where an estimated $3.9 trillion of that capital has been hived off to party officials and their families and associates via corruption and insider deals over the past few years.
    28 Oct 2012, 02:53 PM Reply Like
  • UI


    Centralized control yields corruption at a staggering scale. It is in the formula. Just change the names and the faces.
    28 Oct 2012, 07:42 PM Reply Like
  • If you are equating average hourly earnings with standard of living, average hourly earnings adjusted for inflation peaked in the early 70's and have been on a decline since then. That shouldn't surprise anyone since that's when the unions began their decline.
    The benefits of a country being a net exporter are obvious, Germany for example.
    American oligarchs? or would be oligarchs? GOP PAC and super PAC donors pretty much stand out like a sore thumb. The Koch brothers aren't in the same class as the Russian version but the outsized political influence of a few wealthy individuals isn't exactly what the founding fathers had in mind. The Chinese have clearly developed their own version of oligarchs.
    28 Oct 2012, 08:08 PM Reply Like
  • Unions decline had a lot to do with their employers disappearing as the rust belt got hammered. Average hourly earnings are up about 6X since 1970.


    Benefits of being a net exporter are not obvious. I would rather import the stuff you busted your butt to make and in return give you paper.


    Oligarchs will lose power on the left and right when we quit electing millionaires to office and do term limits to prevent them from becoming millionaires once in office.
    28 Oct 2012, 09:15 PM Reply Like
  • You can't sustain an economy on paper. At the lowest level of economics the paper is only a proxy for purchasable goods. If we cease to manufacture anything (and in this, I am including creative goods (art) and grown goods (crops)), then our currency will cease to have any value.


    A lot of the reduction of employment has to do with the development of more efficient manufacturing techniques. And yes, you are correct that high union wages helped support technology development budgets because saved man-hours equated to more money. In fact, some might argue that increased safety and regulatory guidelines spurred development as well.


    I'm becoming a fan of Joseph Stiglitz because I think he has a strong grasp on the a lot of behavioral economic theories.
    28 Oct 2012, 11:27 PM Reply Like
  • Fr


    You could have an economy where you export very little but have a robust economy as you have an effective domestic economy.
    28 Oct 2012, 11:52 PM Reply Like
  • That is true but it requires significant domestic production to sell to domestic consumers.


    Basically, we could have a fairly robust domestic economy without significant external trade if we all ate at each other restaurants or cut each other's hair. But, a service-based economy makes export very difficult.
    This would cause international demand for our currency to be reduced because the currency could not be exchanged for an exported good or service. Being used as a reserve currency will help but, again, if the only value of the dollar is as a currency standard, it would not be very difficult to establish a new currency standard.
    29 Oct 2012, 12:15 AM Reply Like
  • Yes to all that but trade over the long run is really based on competitive advantage not because I need currency. Currency is to facilitate trade but is not the rationale for trade. If I don't need anything you are selling then I have no motive to trade with you even if I think you are a great neighbor. Fortunately the world is diverse enough with various CA's that people do trade.


    When I say a domestic economy I am not calling out the sectors but rather that the supply of goods and services meets the demand. And keep in mind that contrary to popular opinion the US does manufacture a lot of things.
    29 Oct 2012, 01:14 AM Reply Like
  • A robust economy that exports very little? Perhaps in theory, but it hasn't worked out in reality. Look at Europe, the only healthy economy is Germany, one of the world's top exporters. Then again that's what the Chinese are trying to become, since their customers are all running out of money to import all those cheap goods.
    30 Oct 2012, 08:52 PM Reply Like
  • If a robust economy depended only on exports then all countries would export everything they make and consume everything they import.


    You export what you have a CA in and what you can supply in excess of domestic demand and you import what you cannot produce. The amount of international trade varies depending on these factors.


    With fiat money the amount is not necessarily as important.


    China is full speed ahead on exports. They have over 1 billion people to keep employed and not rioting. They don't care what they are making.
    31 Oct 2012, 12:32 AM Reply Like
  • You forget that U.S. bonds can also be classified as exports. They have value and they are a form of capital.


    Obviously, markets are more complicated than having any that are pure importers or pure exporters because any one-sided relationship like that will fall apart in a reasonable amount of time.
    31 Oct 2012, 01:14 AM Reply Like
  • First the capital is flowing into the US not out when a bond is issued. Yen is old and dollars are bought, etc.


    Secondly does anyone realize that the planet earth is not trading with the Klingons. How could that be? How could we have lived this long without trading with the Klingons? Well so far the planet earth has not fallen apart by not trading with the Klingons.


    Do you get the point?
    31 Oct 2012, 01:48 AM Reply Like
  • Cash is just a proxy for what is still, fundamentally, a barter system.


    What I'm saying is that with a trade deficit, the U.S. is exchanging revenue generating notes (bonds) for imported goods. If, at any time, our capacity for repaying our bonds is cast into doubt, or the dollar inflates so quickly that bonds produce a negative real ROI, our trade deficit will disappear because no country will accept our bonds for their exports.


    We cannot maintain a trade deficit indefinitely because, at some point, people are going to want to use their dollars to buy something.


    I wish I could recall the source, I think it was actually SA, but I was reading an article about how the Chinese have been using all of their stockpiled dollars to purchase dollar-denominated assets like precious metals and oil. This could be the reason that Japan is becoming our number one bondholder. Not because they have been buying more, but because China is executing a shift out of dollars without trading directly with the central banks.
    31 Oct 2012, 10:35 PM Reply Like
  • OK where to start.


    Cash is only part of the money supply and a very small part at that. Money is a store of value and a medium of exchange. I can put money in the bank or my mattress. It is true that it replaces commodities or stone wheels as a form of currency but it does more than just facilitate trade/barter. It is also a store of value.


    Keep in mind that importers in the US can pay for imports with gold, cash, etc. Say I buy Molson Beer from Canada. I send them some kind of payment drawn on me and it has nothing to do with the US government issuing notes. If I made the only import of the year and we did not export anything then the trade deficit is 1 Molson Beer.


    China has been diversifying away from dollars for a couple of reasons. One they were too heavy into the USD and they also had a need to secure commodity supplies for their country. You can also look at oil and gold as currencies in some sense too. They store value and they can be used for exchange of other goods. It makes sense for them to lock down oil supplies. They are also looking at holding other currencies that are more solid. Nobody has it easy because western countries are driving too much debt that needs to be paid back eventually and there is a fear they will rely on inflation to help do it.


    Japan has always been a large investor in the US although I don't know where they are now.
    31 Oct 2012, 10:59 PM Reply Like
  • Klingons? I don't get the point.
    1 Nov 2012, 10:18 PM Reply Like
  • The point is on top of your head.
    1 Nov 2012, 11:59 PM Reply Like
  • ?
    2 Nov 2012, 12:39 PM Reply Like
  • I think it's fair to assume that managers at the "Best of Breed" companies have heard of and are aware of the Fiscal Cliff.


    It's probably one reason why so many companies are accumulating so much cash.


    I'd rather let them manage my money by buying their stock, rather than give it to the government via Treasuries. Stocks will be volatile but over the long run I'd rather the greedy business tycoons manage my money.
    28 Oct 2012, 08:59 AM Reply Like
  • 'Cliffs' are in fashion because of the confrontational environment between government and business. Now that success, hard work and financial reward for such hard work are under attack, intelligent business managers know to await the results of the coming six months. It is sad that we demonize success with terms like 'greedy business tycoons'. I invite those with such an opinion to explain why the so called 'considerate' in government ensure their own financial success at the expense of the hard working tax payers.
    28 Oct 2012, 09:33 AM Reply Like
  • Cala


    Agree with you comments.


    There is also the 4 year POTUS election cycle issue, 1 year budget cycle and every 2 years congress election cycle. Nothing is long term in the US. We are structurally set up for cliffs.
    28 Oct 2012, 11:53 AM Reply Like
  • I think that it's healthy for business and government to be adversaries. Our country was built on adversarial relationships. We were one of the first countries to have true checks and balances and it's those adversarial relationships that forced us to be great.


    If someone from the left and someone on the right can agree to a structural solution (ideally not pork-laden) then the solution is typically better than either side would have produced on their own.
    28 Oct 2012, 11:35 PM Reply Like
  • Fr


    That is not a valid option. Businesses are multinational so adversity just makes them invest elsewhere.
    28 Oct 2012, 11:54 PM Reply Like
  • Sort long as there are customers here, multinational businesses will continue to do business here. There are instances of regulatory overreaches and those need to be addressed but as long as the expected revenue exceeds expected cost, companies will continue to do business here.
    29 Oct 2012, 12:18 AM Reply Like
  • Fr


    No. Return on capital and growth are primary especially with multinational companies. It is dial tone that revenues exceed expenses. Capital flows to the highest returns. So if you as a country are low return you get less and less over time until you are immaterial or are receiving nothing.
    29 Oct 2012, 01:19 AM Reply Like
  • Your argument here is getting a bit esoteric.


    Value, perceived value, and expected value all play a role in capital flow.


    Case in point, during the housing market collapse, Citi and other American firms were still selling stock and crappy products to the Arab countries, because the Arab countries believed that the value that was being presented was accurate. The perceived returns were extremely high, even though the actual returns were much lower. They could not determine a true expected value because they were not given all of the information.


    And, to get back to the point, when I advocate and adversarial relationship, I mean the relationship between the referees and the players in sporting events. Refs do not permit holding because it helps the offensive player out...they penalize the player whenever they force undue risk upon other players (like clipping or facemask penalties). That is the role of government, to set reasonable, enforceable rules to permit rigorous competition but prevent the players from, intentionally or unintentionally, causing undue harm against other players.


    No one likes the refs unless they're calling an unfair game for your side. The same goes for government officials.
    31 Oct 2012, 01:26 AM Reply Like
  • Fr


    I am telling you how US corporations behave which is most important to people on this board since most of the stocks are US companies.


    On you other point, have you ever noticed the refs playing in the game? I like your analogy but that is not how our government behaves. They pick winners and losers. They are in the insurance business in housing and healthcare. The spend more time playing than they do reffing. And their playing sucks and the taxpayers have to pay for their performance.
    31 Oct 2012, 01:52 AM Reply Like
  • I understand about the desire for multinational companies to maximize their return on capital, but, remember that the calculation requires game theory.


    All companies want a reduction in regulation on their particular company but no companies want across the board regulation cuts. Generalized reductions in regulations produce a much larger beta. When things are good, safety nets are unnecessary but, the unregulated companies stockpile less for the bad times.


    Investing in countries with reasonable regulations actually provides a safer investment for those that do not reap direct rewards from the risks permitted in the weak regulatory environments. Compared to much of the rest of the world, we have had relatively few major chemical and biological disasters. This record of believing in and achieving safety is what has established our "brand". As my friend in the internet advertising world says, you can only whore out your brand once. Once the U.S. is no longer considered a safe place to do business because of demolished regulations, the U.S brand will suffer and we will lose a lot of the competitive advantage that we currently have in the world. Talent does not immigrate to the 3rd world and talented foreigners will no longer come here if we permit a regulations reboot.
    31 Oct 2012, 10:56 PM Reply Like
  • The real "fiscal cliff" will come when Americans have to pay much higher interest rates on federal debt. There is no way to avoid a devaluation of the dollar. And there is no way, other than war, to avoid the decline of most industrialized countries and a reduced standard of living for most Americans.
    28 Oct 2012, 03:42 PM Reply Like
  • How many doom-prophets have we heard while the markets went up 12%


    The shmanalysts need to change the pills
    Or maybe it's the media
    28 Oct 2012, 07:30 PM Reply Like
  • "How many doom-prophets have we heard while the markets went up 12%"


    About as many as there were "keep fully invested" prophets when the market was tanking.
    28 Oct 2012, 07:48 PM Reply Like
  • One cliff not in fashion this season is Cleveland Cliffs!
    29 Oct 2012, 03:01 AM Reply Like
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