There is an upside to the Fiscal Cliff uncertainty.
It’s conventional wisdom among investors that going against conventional wisdom is the smart play.
Which begs the question – is it now contrarian to go with the crowd?
We’ll circle back to that conundrum and how to profit from whichever way the Fiscal Cliff plays out in a moment.
Last week the word on the street was that the Obama and the freshly emboldened Democrats were willing, nay, eager, to zoom over the much vaunted Fiscal Cliff.
The theory was that having won his ‘last election’, Obama was free to play hardball and hang the Fiscal Cliff on Congressional Republicans with the goal of taking back the House in 2014… the short-term consequences be damned.
Given that the Democrat coalition consists of folks who receive benefits from the Government and the Wall Street set, New York media types, and Hollywood’s finest, it’s actually conceivable that a fiscal implosion would play well with the base.
Those with the most to lose are working folks and small businesses, so if your income depends exclusively on Main Street now is the time to start looking seriously at the markets because that’s where the money is, as I’ll explain in a moment.
My prediction all along has been that the lizard-brained political hacks in both parties would gussy up some faux reform as a big effing deal in the nick of time and avert the Fiscal Cliff by booting the can down the road yet again.
It’s never good to underestimate Obama’s steely resolve or hubris, but polling gives the Democrats who will be up for re-election pause in letting the Prezzy go full ‘Thelma and Louise’.
Turns out the public is not amused by the high stakes theatrics and would blame both parties equally for failure to avert disaster.
Even if Obama, Pelosi and Reid are Hell bent on going ‘all in’, America can rest assured John Boehner will take advantage of his liquid spine to accommodate too much of the Democrats demands for them to credibly claim any true resistance from the GOP.
But here’s the rub…
Outside the bubble our politicians live within, the cold hard reality is that it is unlikely that their can-kicking deal can paper over the full depth of the Fiscal Cliff.
At a minimum, there will be potholes that will keep the economy from accelerating because we’re all too busy swerving to avoid one road hazard after another.
That means that uncertainty will reign for the next quarter or two (at least) while our ‘public servants’ negotiate behind closed doors with the lobbyists for the best way for them to win at our expense.
There is an upside to this kind of uncertainty… and that is the certainty of how market’s react to uncertainty.
Because of Dodd-Frank and the ‘too big to fail’ bailout policies enshrined in the thinking in DC and at the Fed we’ve got an upside down economy.
Wall Street is gobbling up the paper money the Fed is printing and recycling that money into guaranteed profit on the spread of their near zero cost to borrow the funds and the returns they get from buying Treasury Bonds.
If you ever played Monopoly as the banker and wished you could just take all that toy cash to a real bank and get real money, then you can appreciate how elated Wall Street fat cats are now that Bernanke actually lets them do just that.
Do you think they’ll stop any time soon? The correct answer is, a big fat NO.
Fact is, until the dangerous game they are playing truly blows up in their faces, it will continue. You can count on that.
Meanwhile, capital in the real economy has all but evaporated outside of the energy sector, which means that Main Street is on life support while the Pin Striped Class frolic in oceans of printed money in DC and New York.
So while in bad economic times you’d expect the stock market to go down, it’s not that simple.
The Quantitative Easing and Bailouts have socialized the speculative losses of the last decade and privatized the profits.
That means big banks and big business roll the dice and when they lose, the public pays for it so they win anyway.
And when they win, well, they win.
The public is paralyzed by uncertainty and the fat cats are certain to gain in their rigged win-win game.
Well played, fat cats.
It’s a nifty deal if you can get it… and I’ll show you how you can play along and win the game, too.
It’s deceptively simple, really.
All winning requires is that you cynically suspend your disbelief.
If you’re not profiting right now it’s because common sense is getting in your way.
See, the world isn’t operating by common sense rules anymore.
As long as these dynamics continue, and as long as we have both parties dividing Washington, you can expect to get greater gains by betting on the status quo than fretting a collapse or praying for real reform. Sure, history suggests there should be a financial collapse but keep in mind several exceptions to history…
Recent discoveries of massive domestic oil reserves and the fact that the US is still by far the world’s largest economy change the equation.
Add to that the reality that Europe is in worse shape and China is a house of credit cards and the US actually ends up looking good by comparison.
That means that you can’t take doom and gloom predictions at face value, at least in the short term.
So how do you turn all this uncertainty into high certainty gains?
Remember, the financial collapse that wiped out the savings of millions of Americans in 2008 and early 2009 also made folks who shorted that crash massively wealthy.
You can choose to be enraged about that much like I imagine a gazelle feels when tackled by a lion on the Serengeti.
The laws of financial nature are no less brutal and there is a circle of life aspect to this game.
So I suggest that you choose to understand the world as it is and choose to survive and thrive by playing the game to win.
Think of it like a real world financial ‘Hunger Games’.
The decadent and pampered class in DC, Wall Street and Hollywood are content to watch the little people from the outer districts to fight to the death over crumbs they toss us during biannual elections.
Like the heroes in the movie, you can play the game without preying on others. The financial markets are the best place to do that.
You win when you are right but you don’t cause anyone else to lose.
And like Elizabeth Banks creepy character said in the Hunger Games movie, here’s how the odds may ever be in your favor…
Purely seen through the lens of your own survival and opportunity, the only rational approach is to recognize that as long as nothing intervenes to end these perverted games, it will profit you more to play along than to sit on the sidelines in shock.
Your financial survival is more at risk on Main Street than on Wall Street from this perspective.
Right now we’re seeing a seasonal Santa Claus rally and that means in the short term at least the market is moving higher through the end of the year.
But keep in mind that the folks on Wall Street also profit when markets fall by going short and by scooping up bargains after the little people have been wiped out.
So we’re expecting a potentially steep sell off in January and February.
In that scenario you can profit by rising and falling markets, just like the Wall Street fat cats.
The certainty in this uncertainty is that the markets will be volatile and there are trading opportunities on the long and short side.
Bulls who cling to the rally too hard will suffer through steep drops in the Dow and contrarians determined to be bears will be dismayed at how high this market can go.
Short-term technical trading is the new normal and that is how you can profit from uncertainty with the greatest certainty possible in these crazy times.
David K. Miller
Managing Editor, AbsoluteWealth.com