The Fiscal Cliff Doesn’t Arrive Dec. 31

My Portfolio Guide, and every financial advisor on the planet, has likely had about as many "fiscal cliff" conversations as one could wish for over the past few months. We've gone from calling it the fiscal cliff , to the f-word, to most recently....Y2 Cliff due to a past monumental deadline that was hyped up to extremes by the media and ultimately was a non-event. Matt Pixa and Matt Blake both recall sitting in their respective offices January 1, 2000 when we typically would be watching some college football games or relaxing with families. All hands were on deck for a mad rush to grab cash or at least check what happened. The intricate grid of computer networks never crashed and trillions of dollars didn't instantly vanish when the Times Square Ball dropped in New York midnight of 1999. For all those who "prepared" and went to cash, hoarded food, or finished building that bunker....please let us know if you learned anything.

We did.

We're not minimizing a very real date on the calendar or that the massive deficit and political gridlock at hand is out of control. We simply see this as

more of a fiscal slope more than anything else. If your portfolio is underweight growth vehicles relative to what your longer-term goal and strategies are, it may be wise to buy in on market dips. Over time this is how investors make money. Buy when the herd is scared or being emotional. Stick to your discipline and tune out the noise.

Neither side wants to concede but there is at least a touch less saber rattling than there was last month leading up to the elections. For over a month now, websites like www.marketwatch.com have literally had a "countdown to fiscal cliff" clock. As of this writing we were at about 18 days before the sky falls. Guess what? The actual cliff , and some of its true negotiations start before that. In any case, it's without question that we'll see some more days that are dramatically accentuated due to Y2 Cliff...sorry... fiscal cliff "talks"...but in the meantime use this opportunity to ensure you're properly allocated and that you are ready to buy solid equity exposure on irrational dips.

My Portfolio Guide found the following brief article which was written by Sam Wardell from Pioneer Investments. Please read it. Read it twice if you have to and then turn off your TV.

The news media is breathlessly counting down the days until the arrival of the fiscal cliff on December 31. It may make for good television (tune in tomorrow) but it’s not good economics…or good political analysis. Here’s why:

The bottom line is, there’s no real need to strike a deal by December 31 …or even during the lame duck session before the new Congress is seated in mid-January.

The Deadline is Actually Sooner than Dec. 31

Unless Congress delays its holiday recess, any 2012 deal would have to be proposed as legislation by December 18. So we’ll find out by December 18 whether a deal has been struck in 2012.

The AMT is the most “Cliff-Like” Element

As I noted above, the fiscal cliff doesn’t hit all at once. The so-called “AMT patch” (an annual shell game Congress has played for decades to make future deficits look smaller) expired at the end of 2011. If no 2012 patch is passed, April 2013 tax bills will be roughly $90 billion higher than otherwise. That’s likely to put a dent in the consumer.

Time is an issue here as well. In theory, Congress can address the AMT patch after year-end, but what’s the deadline for the IRS to start printing forms? How about the programmers at the tax preparation software companies? When are their deadlines?

The Fiscal Cliff Deadline Isn’t Even the Most Important Deadline…or the Biggest Cliff

The debt ceiling, in contrast, is a very real fiscal cliff…and it does arrive around year-end…The debt ceiling is a critical deadline. It’s the least flexible, and it would require the largest “fiscal adjustment” if not extended.

Unless Congress raises the debt ceiling, the U.S. government will be forced to stop borrowing and limit its spending to what it collects in tax revenue. In effect, the debt ceiling would force the government to eliminate its fiscal budget immediately. This would be a fiscal tightening roughly twice as large as the so-called fiscal cliff. It would also happen much more abruptly, since the government would effectively have to go hand to mouth almost immediately.

Current projections are that the government reaches the debt ceiling around year-end and that it has enough cash on hand to continue operating for another three months or so. The prevailing assumption seems to be that Congress will vote to raise the debt ceiling without much of a fight. If that assumption is wrong, the ride could get very bumpy.

And don’t forget the rating agencies, which have threatened to downgrade the U.S. if we don’t bring our budget deficits under control. The deadline for a grand bargain which prevents those downgrades is probably late 2013.

In summation: there really are three different deadlines out there: the fiscal cliff, the debt ceiling, and the downgrade. The fiscal cliff comes first, but is the least scary of the three.

Sam Wardwell is responsible for monitoring economic and market developments and communicating updates on financial market performance, economic trends, and the firm’s outlook and portfolio positioning to clients and their advisers.

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