Today’s dead cat bounce will fool the short term greedy into getting back into the stock market. All that really happened was that this past Sunday both Democrats and Republicans went on TV and made nice, nice to each other. The politicos said that they would work diligently on a solution to the fiscal cliff. And then Congress left Washington on holiday until the middle of next week and Obama went to Burma.
That is all that happened. However, all that cozy chatter, following a two-week stock sell-off, apparently was enough to generate a 2% gain today in the S&P 500. Obviously the short term greedy rushed back into stocks not wanting to miss this big rally. They were cheered on by a lot of so-called market pundits on TV whose ratings rally when the market does. One network nitwit even said the market could have only have gone up the way it did today because someone somewhere knows that there already is a deal that will save the world.
What nonsense. Whether or not there is a deal, all I see are a lot of tax hikes. At best, taxes will go up by nearly $200 billion next year and at worst probably double that. Since after tax income is growing at $200 billion annually, a best-case scenario is no growth in US after tax income. At worst, and the most likely outcome, is for a drop in after tax income.
And remember GDP is a garbage number that measures maybe 60% of the US economy. Therefore, my definition of a recession is when after tax income drops year over year for at least three months or more. And that is what I see happening next year regardless of whether there is a deal on the fiscal cliff.
As to government spending, CNBC has been running a string of public service announcements touting all the humanitarian type services that will stop at year end if government spending gets cut. But what CNBC in its reporting does not question is whether the government has been effective in providing those services that will get cut? Would we really be missing anything if it takes the government $3 to provide $1 in actual services? If you run the math the US economy would be better off without that ineffective government spending than with it.
As I said in previous videos, all the talk is about taxes and nobody wants to say that the US will go broke if it keeps spending $3.5 trillion a year while taking in only $2.4 trillion in taxes. Let’s suppose the government takes in an additional $200 billion in revenue from additional taxes and spending stays flat. So what? The result is a no growth economy with ever increasing government debt.
What’s more we all have to pray that interest rates on that debt stay at today’s low rates. The real monster hiding in the corner is a potential cataclysmic rise in interest expense. Remember, the US government debt was only around $4 trillion when Clinton left office. Under both Bush and Obama, government debt now tops $16 trillion. The US is currently spending $230 billion in interest on that $16 trillion of total government debt, which works out to be an average interest rate of 1.4%. What happens if interest rates go back to 3% or even 5%? Bad enough at 3%. Interest rate expenses would soar to half a trillion dollars. At some point the world will begin to doubt US solvency. When that happens interest expense will go through the roof.
Unless a growth genie miraculously pops up out of nowhere, what will happen to the US is called bankruptcy.
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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