How to Survive America’s Great Fiscal Cliff

If you’ve been reading our reports, you’re not a consensus investor that blindly follows the crowd.

You’re aware of the long-term dangers we face.

You have a healthy skepticism of Wall Street hype.

And you think out of the box to find unique ways to make money.

That’s especially important now as the economy lurches toward the Fiscal Cliff — up to $1.6 trillion in tax hikes and spending cuts scheduled to strike January first.

That’s why so many official research organizations, including the IMF and Congressional Budget Office, are so concerned.

And that’s why we polled our readers last week to get their input — and to help you discover what investments and tactics your fellow readers are using.

Our survey was unique on three levels: Nearly 20,000 readers participated, more than in virtually any prior Weiss poll. Their comments denote an unusually broad consensus about the future of America. And the discussion of this crisis on my personal blog was nothing short of explosive.

So I’ve decided to dedicate this issue to the results.

Below are four of the survey questions, along with reader comments and mine as well.

Question 1
How will the fallout of the Fiscal Cliff compare to the consequences of the Great Recession of 2007-09?

The response was shocking to say the least.

Even though the Great Recession was the worst economic decline since the 1930s, 92.3% of respondents say the fallout from the Fiscal Cliff will be as bad as — or worse.

The results speak volumes:

Consequences won’t be as bad as Great Recession 8.7%

They will be about the same as Great Recession 16.5%

They will be worse 74.8%

Dale, for example, says that, in the wake of a recession, you could see an old-fashioned run on the banks.

Indeed, anyone who thinks that our “modern banking system” is invulnerable to the danger of bank runs need only look back four years — to August and September 2008, when depositors fled from Washington Mutual en masse.

This was an institution that had been founded in 1889, had survived the Great Depression, had grown its assets to $327.9 billion, and had become THE largest savings and loan association in America.

But tradition and size alone were no defense against the onslaught of panicked depositors: According to the Office of Thrift Supervision, in just nine nightmarish days in September, Washington Mutual customers withdrew $16.7 billion in cash, or about 9% of the thrift’s deposits.

Suddenly, America’s largest thrift was America’s largest banking failure of all time; and suddenly megabanks like Citigroup and Bank of America got hit with withdrawals as well.

In response, Congress hastily passed the biggest bank bailout of all time and authorized the FDIC to boost its deposit insurance limit from $100,000 to $250,000 per account, helping to stem the bleeding.

Today, the crisis is subsided, and because of the $250,000 limit, depositors are less likely to pull out their money in fear.

But many U.S. banks depend heavily on “hot money” — mostly large, institutional deposits that are uninsured and are more prone fleeing at the first signs of trouble.

Result: Banks can fail long before most average consumers get wind of the problem.

How would this impact the global financial system?

Brian M says that, if the Fiscal Cliff comes about and the economy shrinks, it will destabilize confidence in America, undermine the entire global banking system and “create a worldwide disaster that may take decades to clean up.”

Ron K writes: “Want to know what happens? Same as what is happening in Greece.”

And Peter B warns: “We risk urban violence, price controls, make-work government programs, and severely slashed deployment of job holders’ discretionary income. Good luck, America!”

My view: Yes, the fallout from this crisis will be far greater than most pundits now dream possible.

But if you’re among those who believe our leaders can never change their ways, I suggest you reconsider. When the country is down and the collective pain is severe, there’s every reason to hope for a new beginning.

So let’s pray that our leaders can wake up before it’s too late and take steps to avoid the worst of these extreme scenarios.

Question 2
In the Great Recession of 2007-09, the S&P 500 plunged 57%. How do you think stocks will behave in this crisis?

Given the broad influence of Wall Street hype, I thought some of our readers might be turning bullish.

But only 5% are in that camp, while over 70% believe the stock market will fall AT LEAST as deeply as it did last time:

The S&P 500 won’t fall, and it may even rise: 5.0%

It will fall less than 57%: 24.7%

It will fall about the same as last time: 25.2%

It will fall more than 57%: 45.1%

Jules is among them, writing: “History shows that manias usually end in an overall 87%-89% meltdown.”

John agrees the market could fall that far, but sees it happening over a long period of time. He says the United States is following a path similar to Japan’s. “Their housing and stock market fell about 80% over the past 20 years,” he writes. “I could see things slowly drifting down over the next ten years.”

Tom, meanwhile, sees a Dow decline that’s approximately equivalent to the 2007-09 bear market, forecasting that the Dow will drop to 6,000 or less.

Cleary, these bearish views are not shared by Wall Street.

Based on the recent buying behavior of institutional investors — helping to push the averages a bit higher week after week — it seems as though the majority of Wall Street pros are living on a different planet.

They’re buying shares with other people’s money. Or even if they are bearish personally, many are cajoling their clients to load up with shares.

Who’s right — the Wall Street pros or the majority of our readers?

Only time will tell. But I can tell you this with certainty:

• The Wall Street pros were equally bullish — and wrong in January 2000, when the market was on the brink of a 75% wipe-out in the Nasdaq … and again at the top of the market in the fall of 2007, when the S&P embarked on bear-market decline of 57% Each time, they told their clients to “buy, buy, buy” just before stocks collapsed.
• In contrast, at major tops in the market, our readers have been rightfully bearish, generally refusing to buy until they could pick up big bargains.

Question 3
The last time, Washington responded to the crisis with massive stimulus packages and unprecedented money printing. What do you think Washington will do in response to this crisis?

Here, the results are also clear:

Washington won’t respond at all: 7.5%

Reponses will be smaller than last time: 20.9%

About the same as last time: 34.3%

Larger than last time: 37.3%

Ronald writes “The administration/Fed will continue the ineffectual Keynesian ‘throw-money-at-the-problem’ approach, thereby sucking the last life’s blood out of the dollar. Sadly it’s ALL they know to do when economic factors tank. Our inflation will continue to rise skyward.”

Kevin C offers a different scenario. “We are heading for another deflationary depression,” he writes. “Cash will be king!”

My view: We could see a unique see-saw of BOTH deflation AND inflation, with sharp price declines followed by giant surges. For most investors, it will be a nightmare roller-coaster. But for those who understand the pattern, it could yield a long series of unusual profit opportunities.

That covers the majority view.

Meanwhile, however, some of our readers seem to believe the Democrats and Republicans can make a deal to avert the Fiscal Cliff.

Charlotte, for example, predicts they will simply cancel the tax increases and extend the Bush tax cuts.

And Fritz L writes “It’s likely that the Fiscal Cliff will be postponed in December for 90 days to let the new Congress deal with it.”

My view: Yes, it IS possible they’ll manage to cancel some of the spending hikes and tax hikes. But reaching a full-scale kick-the-can compromise is going to be extremely difficult because

• Congress is hopelessly gridlocked until the November election.
• After the election, Democrats and Republicans in Congress will have only seven weeks to reach an agreement.
• To prevent the nation from falling off the Fiscal Cliff, they’ll need a bipartisan agreement that represents an 180-degree turn; that reneges on scores of solemn promises made last year. Easier said than done!

And even if Congress can postpone most of the cuts and taxes, the country will still sink into a recession.

Why? Because no matter who wins in November, both Democrats and Republicans will be so focused on the Fiscal Cliff, they’ll neglect the economy’s continuing addiction to new fiscal and monetary stimulus.

Result: Washington won’t give the economy its next “fix” until it’s too late; and by that time, the decline will have already gained tremendous momentum.

Question 4
How will gold and silver
prices respond to this crisis?

Over 88% of our viewers see gold and silver rising, with most of those expecting precious metals to rise dramatically:

Gold and silver will fall: 7.7%

They’ll stay about where they are now: 3.9%

They will rise somewhat: 27.1%

They will rise dramatically: 61.3%

Glenn A, for example, predicts gold will hit $2,500 per ounce; silver, $150 per ounce.

Raymond adds “The current inflation-adjusted 1980 peak in gold is about $2,500 an ounce. If things are twice as bad (debt levels, unemployment, etc.), then gold hitting twice as high, $5,000, is not unbelievable.”

Larry N generally agrees, writing: “I believe gold could hit $5,000 per ounce, and silver could reach $120 at their peaks.”

And Tim A is explicit about which precious metals he invests in: “Currently,” he writes, “I am looking at physical gold and silver, with an appropriate amount of gold in pre-1933 coins. For silver, Canadian coins (e.g., silver maple leaf) look good, as well as “junk” silver (pre-1964 US coins). The more dollars you print, the more gold prices will surge.”

Meanwhile,

Official Sources Continue to Warn of the Dangers

JP Morgan — the global financial services firm with $2.3 trillion in assets — says that barring a miracle in Washington, America will fall “head first into the fiscal meat grinder.”

Federal Reserve Chairman Ben Bernanke agrees, saying that paralysis in Washington will cause America to plunge off the “fiscal cliff” on January 1, 2013.

And former Treasury Secretary Robert Rubin warns that the impact of the fiscal cliff could be worse than the fallout from the 2008 financial crisis, which resulted in the worst recession since the Great Depression.

According to these insiders, this new crisis will vaporize millions more jobs in every sector of the economy …

Tear more than $1.6 trillion dollars out of the hands of U.S. consumers and companies …

Bankrupt thousands of businesses …

And drive the unemployment rate to unimaginable levels.

Bottom line: Don’t let the stock market’s recent strength fool you. Stay the course and stand by for our continuing updates.

Good luck and God bless!

Martin