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    What Will Happen When We Hit the Cliff

    Few places for financial assets to find shelter
    by charleshughsmith

    Wednesday, December 26, 2012, 6:52 PM

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Executive Summary

  • A rising dollar would negatively impact stock market profits and valuations
  • Interest rates ultimately will rise, and that will be a game-changer
  • Investors will eventually realize that "risk-free" assets (e.g., U.S. Treasurys) are NOT safe havens
  • Why there will be few places for financial capital to find shelter in 2013

If you have not yet read Part I: The Structural Endgame of the Fiscal Cliff, available free to all readers, please click here to read it first.

In Part I, we covered the basics of wealth and political power in the U.S. and found that the Fiscal Cliff is only a symptom of a structural endgame in which the imbalance between what has been promised and what can be collected in taxes will continue growing until it triggers a financially driven political crisis that I believe will inevitably become a full-blown Constitutional crisis.

Though there are many facets of this long-term political crisis that are worthy of further exploration, we will to start with three financial aspects that could start impacting households in 2013: a rise in interest rates and a resultant destruction of bond valuations, a rise in the U.S. dollar that negatively impacts U.S. corporate profits and thus stock market valuations, and a reduction in upper-income households’ spending as a result of higher taxes that depress discretionary consumer spending.

A Rising Dollar Negatively Impacts Stock Market Profits and Valuations

Let’s start with a topic that I have covered in depth over the past year, the structural reasons behind the rise of the U.S. dollar (USD).  The recurring fantasy that Europe’s fiscal and debt crises are “fixed” and the Federal Reserve’s money-printing/Treasury bond purchases have recently depressed the USD, but in the longer term, the USD has been tracing out an unmistakably bullish pattern of higher highs and higher lows since May 2011…

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