Fiscal Cliff No Joke

Charts: The market is in a rally attempt. It is not in a rally. It needs to consolidate its gains for about 4 days and then have a follow through day (up in bigger volume than the early stages of the attempt) to have an actual technical rally, which will end the correction. The S&P 500 has inched up above its 200-day moving average. It needs to hold above this level for a technical rally to take hold.

Fundamentals: Some in our core group are poo-pooing the damage that may occur if the US economy drives off the fiscal cliff, which is to say that Congress does nothing and allows scheduled spending cuts and tax increases to occur. Here is the best way to think about the fiscal cliff: forget the spending cuts, they are mostly smoke and mirrors, the only cuts that are real will hit the Pentagon. Instead let's simplify the whole issue by focusing on the tax increases. If we drive off the cliff, then $400 billion in new taxes will hit in 2013. Maybe nothing bad will happen. Also, maybe pigs can fly. No laws of aerodynamics are violated with the notion of pigs flying: it is within the realm of possibility. The same is true of this gargantuan tax increase. Maybe. Maybe. Maybe. Okay, let's get past anything is possible. In 1938 a similar tax increases hit the US economy as it was recovering from the Great Depression. This sent the US economy back into a tail spin. In Europe similar tax increases under the auspices of Austerity have plunged that continent back into recession. Every historical example that we can name tells us that a big tax increases right now will smash the US economy back into a savage recession.

Long War: The fiscal cliff generates real cuts to the Pentagon, $50 billion in 2013. The Pentagon has no discretion over where to cut. Instead the cuts are designed to slash the most vital programs and weapon systems, not (for example) health care for retired veterans (which wouldn't hurt military capability). The cuts are designed to cripple national defense. The cuts are like a man kicking himself as hard as he can in the balls. They were designed this way to make the Republicans bow to the will of the Democrats. This shows how stupid and weak the Republicans are but more to the point if these cuts go through America will suffer huge losses in the Long War and China will roar like the Great Dragon it is. Just like firing CIA Director Petraeus, these potential cuts show how the awesomely powerful USA can only be hurt by one great power on Earth: the awesomely powerful USA, our own worst enemy.