Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,116.17 -8.28 -0.27%
Hang Seng 26,503.93 -17.92 -0.07%
Dow Jones 26,787.36 -29.23 -0.11%
Shanghai Composite 2,991.05 -16.84 -0.56%
The Biggest Uncertainty Surfaces After Obama Stays In White House
Perspective | 09 November 2012
By: Gabriel Gan
Articles (41) Profile

Here we go again, facing one uncertainty after another, even before the tears of Republican supporters have dried. We, as investors of the stock market, are men and women made of steel so much so that our hearts and minds have been conditioned to handle bull markets, bear markets, euphoria, depressions and whatever the stock market has to throw at us.

We have braved the shock waves that emanated from the US when Lehman Brothers collapsed; we have survived the Greek tragedy; and we will probably think that the US fiscal cliff is just part of the plot to make us turn our backs on the stock market and never to look back.

But yet again, we are like lizards – we lose our tails and come back even stronger – who will continue to stick to the stock market despite the fear of the US economy falling off a cliff, or into an abyss if you like.

What is the fiscal cliff? Why is it affecting the moods of investors so quickly?

The Fiscal Cliff Explained!
Market observers, including myself, have warned about the fiscal cliff that makes the outcome of the US presidential election look like a molehill next to a mountain. I have said on various platforms that it does not really matter who becomes the next US President because the ability to control the Congress – the Senate and the House of Representatives – is pivotal to overcoming the threat of the fiscal cliff blowing in our faces.

As the Congress is now divided between the Democrats and the Republicans, the bickering that we witnessed over the last few years have become a norm in US politics. Now that the Congress continues to be divided after the election on 6 November, much remains to be seen if President Obama can broker a deal to avoid the fiscal tragedy. The divided Congress for the next four years till 2016 can probably explain the triple-digit fall in the Dow Jones Industrial Average (DJIA) on 7 November.

According to Wikipedia, “The United States fiscal cliff refers to the effect of a series of enacted legislation which, if unchanged, will result in tax increases, spending cuts, and a corresponding reduction in the budget deficit. These laws include tax increases due to the expiration of the Tax Relief, Unemployment Insurance Reauthorisation, and Job Creation Act of 2010 and the spending reductions under the Budget Control Act of 2011″.

If the legislation does go through in January 2013, the combination of higher taxes and spending cuts would reduce the deficit by an estimated US$560 billion but it will also mean that Gross Domestic Product (GDP) will fall by about 4 percent, dragging the US economy into yet another recession.

Senior aides of President Obama, meanwhile, said that the President will broker a deal as soon as a few days after being elected to avert the crisis. This could mean that the rest of the trading days in November and even December could be choppy and volatile – something that our hearts of steel are conditioned to handle, right?

In reality, the fiscal cliff is a can containing previous bickering and brokered-deals being kicked down the road that will result in more political bargaining. At the end of the day, this crisis and the debt ceiling will all be met with a solution.

As long as the Fed continues with QE III and the US economy continues to strengthen, the fiscal cliff is just trading noise that serves no more than to provide savvy investors with the opportunity to buy cheap.

This QE III Isn’t The Same?
With the ghost of inflation still haunting the rest of the world except Europe and US, it seems that QE III has yet to achieve the desired impact – at least for those who believe that money will flow into Asia like hot lava flowing down the slopes of a volcanic mountain.

No, property prices are not shooting through the roofs; No, commodity prices are not surging like a runaway train; and, no, investor sentiment and equity prices remain rather sane in spite of pots of gold being poured into Asia by hot American money.

If hot money is really that hot, then it is unlikely that owners of these funds will allow it to turn cold by parking in physical properties now that China, Hong Kong and Singapore governments have placed prohibitive curbs on property purchases by foreigners and corporations. With the huge stamp duties and taxes being imposed, hot money must make gains of at least 10 percent to 20 percent before it can exit with a profit if invested in physical properties.

If funds do park their money in physical properties and try to create another Bull Run in physical properties, it will probably spell the beginning of the end of the property bull cycle because prices will by then be at ridiculous levels.

Likewise for commodity prices i.e. crude oil, palm oil and even gold, prices have been and remain depressed. When US, followed by China, announced huge stimulus measures in before the turn of the previous decade, commodity prices surged due to China buying up almost anything under the sun. China has since learned its lesson and this explains why the Chinese leaders are not doing anything more than they have done to boost economic growth.

Will the new batch of Chinese leaders introduce fresh stimulus measures? Apart from pump-priming the economy by investing in agriculture and infrastructure, it is highly unlikely that more will be done considering a rebound in China’s manufacturing and non-manufacturing data for October. A few more months of positive data will probably indicate that China’s economy is out of the woods.

There is nothing wrong with inflation if it is supported by economic growth as opposed to speculative boost. We shall now wait for China’s new leaders to give an indication of their direction for the Chinese economy and for the fiscal cliff to be over before we can speak of investing in the stock market.

It has been a long time since investing in stocks have truly been investments. Most of the time, traders dominate the market and gains vanish as quickly as they appear because market participants no longer have the conviction to invest owing to the topsy-turvy nature of the stock market in recent years.

Meanwhile, continue to trade and buy on dips but do not over-commit yourself. The next year, which will reveal the impacts of QE III, will not be easy with China trying to transform its economy into a consumer-based economy as opposed to one that is dependent on investments and exports. Just in case you have forgotten, Europe remains very much on the horizon.


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.