Tags: Fiscal Cliff | economic | fundamentals | correction

World Still Has Many Financial, Economical and Geopolitical ‘Cliffs’

By Hans Parisis   |   Wednesday, 02 Jan 2013 09:46 AM

Finally, policymakers in Washington have averted the fiscal cliff that would have caused $600 billion in automatic tax increases and spending cuts, which probably would have pushed the U.S. economy back into a recession.

So far, markets all over the globe have rejoiced at the news and we see “risk on,” at least for now. In my opinion this is based on nothing more than delusional optimism because the majority apparently thinks Washington got finally its act together and was able to agree on a bipartisan deal. However, when you only look at the voting, 172 Democrats and 85 Republicans voted yes, while 16 Democrats and 151 Republicans voted no.
Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Once again, the less markets know, or accept to know, the more markets rally. Now, the questions and looming fights on the debt ceiling; the sequestration measures, which stand for automatic spending cuts; and the budget still have to be faced within the next two months. No doubt there are still a lot of uncertainties related to this situation.

As a long-term investor, I certainly wouldn’t chase any “risk on’’ move in any of the markets anywhere when it’s not based on sound economical fundamentals. Keep in mind that global growth is still expected to slow down further during 2013 and the coming budget and automatic spending cuts, as well as the fiscal cliff deal, will slow U.S. gross domestic product (GDP) growth in 2013.

The Social Security payroll tax increase of 2 percent, from 4.2 percent to 6.2 percent, and the coming sequestration measures will probably cut about 1 to 1.5 percent from annual GDP. For traders, even if it’s only for a limited time, prospects for interesting trades are back on the shelf, but these trades are, as always, not risk-free.

Talking about sound economical fundamentals, it’s certainly not in the eurozone we’re going to discover them anytime soon. The eurozone Purchasing Managers’ Index (PMI) numbers for December show continuous widespread downturns in all member states except Ireland. The eurozone PMI numbers (from worst to best but still in contraction mode) were: Greece at 41.4; Spain and France at 44.6; Germany at 46; Italy at 46.7; Austria at 48.1 and the Netherlands at 49.6. Ireland came in at 51.4.

Yes, the eurozone remains well-mired in recession, with record-high unemployment and no signs emerging of healthy growth anywhere. Notwithstanding that, all major markets of the eurozone are up Wednesday by more than 2 percent. Yes, markets seem not to worry about the economics and remain happy inside their smoke-and-mirrors fantasy world so far and surely as long as it lasts.

For the time being, I would take the loudly trumpeted manufacturing revival of China with a grain of salt. While China’s PMI number came in at 51.5, this was mainly generated by its own state spending and not because of a global economical resurgence that was confirmed by (slightly) weaker export orders.

Long-term investors should be cautious in the United States, as bullishness seems to be high. The most recent Consensus Stock Index showed bullishness at 49 percent and the Market Vane Index showed bullishness at 63 percent. Both high bullish readings should probably be signs of market tops, as usually has been the case in the past.
Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Please don’t misunderstand me; I’m not predicting markets are going to collapse tomorrow, but in my opinion, I wouldn’t bet on continuous higher markets in the foreseeable future. I’m still convinced we are in a “topping” process and markets could severely correct soon, but that could stretch into the next few years.

As a long-term investor, I would try not to neglect taking my personal precautions for not being surprised when sudden important downward moves occur. Don’t forget, there are still way too much financial, economical and geopolitical “cliffs” out there in various important places in the world.

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