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Part I: Ignoring the Fundamentals?

Is The Fiscal Cliff is now behind us?

“…$620 billion in tax increases is spread over 10 years, so it is only $62 billion in 2013. To put this in perspective, the Federal budget deficit in 2011 was a whopping $1.089 trillion. This amounts to only 5.7% of the 2011 budget deficit!” (link)

Not 6% of the total debt, not 6% of the Federal Budget, but just 6% of the $1 trillion-plus deficits to be incurred in each of the following years. Moreover, this assumes that revenue (taxes) meets projections. Remember that the rich are also the successful and have proved adept at changing behavior to manage their tax bill.

So, the answer is: no. The Fiscal Cliff is still very much unsolved.

Furthermore, a measure of how expensive stocks are relative to earnings is the Shiller Price/Earnings ratio. It is above historic averages at 22x’s. This generous premium surely signals good times are soon to appear. Or are they? Chart after chart of economic data still shows little sign of this. So what’s up?

This stock market is on a liquidity-driven rocket ride as the U.S. Federal Reserve mints new dollars from nowhere to accommodate the massive debt binge of our Government. Currently, our Federal Reserve is purchasing $85 billion of bonds per month to maintain our record low-interest rates. This is $1 trillion per year compared to U.S. GDP of about $16 trillion. It is estimated that 42 cents of every dollar spent by our Government is borrowed (link). All this liquidity pumped into the system by not just our Federal Reserve but, by the Bank of Japan, and European Central Bank, is driving stock prices with no apparent end in sight. This market is on a rocket ride.

This news is not new. It was the case a year ago when I was recommending caution. It seems nothing has changed. Our government is still irresponsible, the economy is still mired down, the Euro is still a bankrupt idea, and the stock markets continue to go up.

After proofing the above for me, one of my managing partners sent me a copy of the Daily News dated 11/29/1949 titled “Ode To The Welfare State”. This article foretold the end of American prosperity. It reminded me that our Country has been here before and survived to scale to new heights. He also reminded me that there are currently many highly successful companies driving their stock prices higher.

Laszlo Birinyi, a veteran market historian to be respected, was right last year and is still bullish. His recommended portfolios were up 3%, 7%, and 15% for 2012. He chooses his words carefully and, is very positive for 2013 (link). Birinyi’s newsletter is provided to me by my other managing partner.