Goldman to Clients: Get Out of Domestic Stocks Before Fiscal Cliff Hits

by Nigel Bolton-Shaw on September 14, 2012

CNBC reports that David Kostin, Goldman Sachs’ chief U.S. equity strategist, has written to clients “pleading” with them to remove their assets from the stock market.

The operating principal is that the United States is looking at a 12 percent drop in stock market averages because Congress will not address the necessary issues regarding the nation’s solvency.

Kostin cites lack of action regarding taxes and the nation’s debt ceiling. Here’s an extract from the article:

“Political realities and last year’s precedent suggest the potential that Congress fails to reach agreement in addressing the fiscal cliff is greater than what most investors seem to believe based on our client conversations,” said Kostin.

The so-called fiscal cliff is the expiration of payroll, capital gains and dividend tax cuts at the end of this year. It also refers to the mandatory sequestration of spending that resulted from the vicious debt ceiling fight last summer.

Perhaps this is the most concerning part…

“Last year, the deadline for Congress to raise the federal debt ceiling was known months in advance,” states the report. “Nevertheless, Congress was unable to reach an agreement that satisfied all factions. Investors were stunned and the S&P 500 plunged 11 percent in 10 trading days.”

Kostin sees the bottom dropping out within the context of a Congress that won’t take any measures to deal with pressing issues because of the upcoming elections. Worst case: a GDP that actually contracts in 2013. “We believe the uncertainty is greater this year than it was 12 months ago,” wrote Kostin.

Kostin’s alarmism may certainly be justified. The US national budget is in a terrible state and Moody’s just threatened a downgrade.

The total amount of indebtedness is somewhere in the area of US$200 trillion. There is controversy over how much US governments at various levels have available to them in terms of historical assets, but this is probably an insurmountable sum without various defaults.

For investors, the state of US markets means that opportunities abroad, commodities and gold and silver (especially bullion), should be strongly considered.

The alternative is dollar Treasuries. But do you really want to be sitting in fixed income when the US hits a “fiscal cliff?”


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