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Sipp Investor: US faces its 'Thelma & Louise moment'

Robert Kyprianou explains how he has positioned his pension savings as the US heads towards the dreaded 'fiscal cliff'.

Sipp Investor: US faces its 'Thelma & Louise moment'

After months of campaigning including live televised debates and countless hours of advertisements, with a third of the Senate and the entire House up for election, against a backdrop of highly challenging economic conditions, we finally have the results of the world’s most important elections:

  • No change: The House remains Republican, the Senate Democrat and the White House Obama’s.

So, as you were then.

Normally, this wouldn’t matter too much in general terms, nor would it mean anything much for my self-invested pension plan (Sipp) – the US economy typically just gets on with it while Washington huffs and puffs.

Why the election matters

But this time I cared.

I cared because the US economy faces the ticking time bomb of the fiscal cliff. I cared because the proposed solutions presented by the two parties and their presidential candidates are grounded in a deep ideological divide. I cared because the political make-up of the US legislature in the past four years has turned this ideological divide into a real-life deadlock. I cared because I wanted the US electorate to resolve the deadlock so I could figure out what to do with my Sipp (self-invested personal pension)!

And it does matter to my Sipp. Look at October. During the month the value of my Sipp rose by a paltry 0.2%. I say paltry because my benchmark (50% UK equities, 25% euro zone equities, 25 % UK gilts) rose by 1.1%. So far this year my Sipp has risen 10.5% in value and my benchmark by 6.6%.

Although my holdings of high-yield and emerging-market debt (26% of the portfolio) continue to outperform the UK gilt component of my benchmark, the damage in October was primarily inflicted by my equity 'barbell' – overweight US and emerging market equities, underweight UK and eurozone equities.

Nearing the cliff edge

The real culprit was the US, where the market was down on the month compared with rises in other parts of the world.

With this in mind, I hoped the US electorate would give the legislators a clear mandate on how to deal with the fiscal time bomb of the fiscal legislation enacted in the past three years.

Left unaddressed, the US economy will be hit by sharp increases in taxes and a broad range of sequestered public spending cuts in 2013. The Congressional Budget Office (CBO) estimates that the effects will be to reduce the budget deficit from around 8-9% of GDP to around 2% in the next three years.

The impact of this fiscal consolidation on a fragile economy and recovery will be to almost certainly drive the US into a double-dip recession with global economic and market implications – a Thelma & Louise moment.

A no-win situation?

Faced with such a clear and present danger and armed with a revitalised electoral mandate, surely US politicians will rise to the occasion and deal with the threat? Unfortunately, there are two key reasons why this could be a real cliff-hanger.

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12 comments so far. Why not have your say?

Feisal Eissa

Nov 12, 2012 at 12:13

Does that mean no change to your portfolio then?

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Nov 12, 2012 at 12:34

So, let's see....Greece going bust, new Eurozone crisis, US politicians playing chicken (again) and a looming Israeli strike on Iran. And you're waiting to see what happens. How is that positioning your portfolio? You might at least tell us what's in this robust box.

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Nov 12, 2012 at 12:40

I avoid US companies, I am disgusted by their 35% tax rate on divis, no matter how many tax forms for the lower rate I send back, never mind the refusal to redate a divi cheque.

More to the point, I am being taxed, but have no say (a vote-no taxation without representation), quite heavily.

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Nov 12, 2012 at 13:08

Been watching and buying into the Fox news scary stories?

The so called fiscal cliff is nothing other than a deadline bult into the US budget agreement to ensure that the question of the defecit was out off until after the election.

it will now be addressed, there may be some pain to endure as a result, but not yet time to buy into the Fox news hype.

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Secret CEO

Nov 12, 2012 at 14:32

Hi Feisal - yes...for now.

Hi Drake - if you are not a regular reader I apologise that editorial word limits prevent me from repeating my asset allocation/ invetsments each month. However, as you are interested, I can give you a high level view of asset allocation, relative to my benchmark (see article): Overweight cash by 14%, underweight equities by 14%, within equities underweight eurozone equities by 25%, underweight UK equities by 31%, overweight US equities by 11%, overweight emerging market equities by 22%, overweight specialist equities (financials/ commodities) by 7%, overweight credit bonds by 26%, underweight government bonds by 25%. So from this you can tell that I dont like Europe, am a little defensive (for now) and believe UK governement bonds are relatively expensive.

Hi Madmitch - sorry, dont watch Fox News, what are they saying?

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William Phillips

Nov 12, 2012 at 16:12

Whatever Rob K thinks, there is no real ideological clash in US federal politics, which is why the country never really gets to grips with its version of the universal problem in 'democratic' polities: how far can you go on kicking the can of excess spending to keep the sheeple sedated down the road?

Romney was a RINO, Obama a centre-leftist who ripped off Romney's healthcare plan and thereby added to the USA's near-insolvency. Both were chosen by big business cabals to represent political parties which barely exist any more at local elections, where candidates frequently change their colours and usually get elected on public perceptions of their personalities as massaged by billions of campaign money.

The last time American presidential candidates had a serious argument in public about what is to be done was the Lincoln-Douglas debates. After the War Between the States, the country was so traumatised that it was tacitly agreed that real, red-meat political disagreement was too dangerous. So instead they have a spoils system where everyone gets a turn at the trough (e.g. through a divided Congress, as now), one 'moderate' changes places with another in the White House, electoral boundaries are fixed so incumbents rarely lose, and so-called debates are soporific swappings of sound bites presided over by a 'moderator'.

The masses cannot think, and a democracy has evolved that almost perfectly prevents them from having to do so. The USA's collective IQ sinks ever lower as the whites are outbred. The voters are sleepwalking over their fiscal cliff because no leader in office has dared to tell them the hard facts. Spending more than you earn and trying to pass the burden on to future generations is a wheeze you cannot get away with for ever. But who would dare advocate real, deep cuts in entitlement programmes, either for the 'disadvantaged' or the porkbarrelling military industrial complex?

When a radical critic such as Ron Paul arises, the prostitute media ignores him or defames him as an 'extremist'. No messing with the Federal Reserve, the Bilderbergers, the Council on Foreign Relations or the Tweedledum/Tweedledee alternation of Blue and Red, no sirree!

But the intelligent fraction of Americans, esp, the younger ones who will have to pay for the mess, listen to Paul and his kind; they shun mainstream media for internet exchange of ideas, and they put Dr Ron's son in the Senate. Some Tea Partiers in Congress are moving that way too, sensing the old system of opinion-suppression ('manufacturing consent' as Chomsky called it) is almost finished. People are not quite dumb enough, not after 'weapons of mass destruction' and all that neocon-MIC jazz designed to invent another intimidating enemy after the commies fell, so the elite can keep citizens in awe of their brilliance at 'keeping us safe'.

Voters may be cowards about the paper tiger of 'Terror', but theiir credulity was strained a little too far. A large proportion now thinks 9/11 stinks. They believe nothing that comes out of a politician's mouth. The most striking fact about the 2012 campaign was the universal lack of enthusiasm and low turnout. Americans are voting with their bottoms.

Either the USA evolves a system that allows it to talk turkey about its failings or it gets owned by China. One power is becoming more open to self-criticism, the other has gatekeepers to howl it down.

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nick sunman

Nov 18, 2012 at 11:37

Does anyone have a view on emerging market local currency debt? I am loosing money on my portfolio (second year running ) mainly gold shares and commodities ,I am understanding the concept that I really dont know where the market head on a short to medium term basis and it hurts ! any other take on descent portfolio for the next 10 years ?

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Nov 18, 2012 at 11:44

@William Phillips

You are beginning to sound like all the other conspiracy theorists. i.e. putting a highly intellectual and academic counter-argument to events which have long since past. George W Bush, Donald Rumsfeld, and Dick Cheney are history; their polical doctrine is no longer relevant.

To my mind, the aftermath of hurricane Sandy could be the crucial factor in chrystallising a consesus.

Governor Cuomo has already asked congress for $30 billion dollars for the New York recovery programme. Governor Chris Christie is likely to ask for a similar amount for New Jersey.

Although initially fiscally damaging, there will be an eventual upside. The huge task of rebuilding will create much needed jobs not just locally, but in the supply chain as well. The cliche "Every dark cloud has a silver lining" could not be more apt.

However that still leaves congress to decide how to deal with the horrendous deficit.

Warren Buffett has already proposed that Govt. should tax people like him more! On that occasion he was laughed out of the White House. Maybe this time he can persuade Republican Congressmen to take him more seriously.

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William Phillips

Nov 19, 2012 at 12:20

There has been a warfare/welfare consensus in US politics since 1940, and you think a hurricane is all it takes to blow it away?

Get real. Political division in the USA is a sham, a joke the voters have seen through. The country is permanently ruled by a shadow government of globalist traitors, mainly banksters, oil prospectors and war profiteers. The vapid alternation of blue and red, the 'bitter' campaigns about personalities and trivia, the whole horse-race atmosphere. merely preserve dimwits' illusions of being free to choose their leaders.

Through their tools-- politicians and media opinion manipulators-- the elite bribes people with their own money to give themselves (and the 47% who are not net contributors to the Federal exchequer at all) doles, quotas and systematic favouritism against the white majority. Or tax and, more and more, debt pay for the 'security' Suzy Soccermom has been told she needs against a world of enemies.

Only these enemies are deliberately manufactured to keep the sheeple cowed under Nanny State's apron: America provokes attacks on itself, paltry though they are, by endlessly meddling in the internal affairs of other countries worldwide against the specific injunction of its Founding Fathers. Not one of the enemies the USA has confronted since the War of 1812 was really, previously inimical: from Mexico in the 1840s to 'Islamofascism', they were all reacting against the activities of the greediest and most piratical (and hypocritical) predator of modern times, the USA and its money-mad elite.

The USA has many sins on its conscience, from the Indian Wars to Nagasaki and Agent Orange and drone strikes. It has become an ugly, violent, demoralised and deeply divided country, racked by guilt it cannot admit because of its narcisstic delusions about being the envy of the rest of us. That is how a parvenu always supposes the world sees him-- not realising it is sniggering at his vanity and waiting for the great fall he is spending and splurging his way towards.

Probably the US has less than 50 years to go in its present form. Its credit is failing, foreigners are peacefully occupying it and buying it up as it flounders in self-created foreign morasses. It has long since ceased to supply a moral example, and is beginning to lose its reputation as the Golconda of the common man as well: many Americans are already living at Third World levels in some respects, notably heathcare and unemployment insurance, while the former Third World becomes First and US jobs are ruthlessly exported by unpatriotic Fortune 500 corporations.

None of this has much to do with Bush, Cheney, Rumsfeld et al, whom I did not mention. They are the inheritors of a rot which possibly set in as early as the 1970s, between Nixon taking the dollar off gold and the defeat in Vietnam. But it takes a long time for the drugs to stop working.

Suddenly pessimism has become the norm among the boooboisie. Scales are falling from eyes. The internet helps, by undercutting the old monopolies of consent-manufacturing. Some Americans are starting to grasp how they have been swindled: how all that 'wealth' and 'power' is becoming worthless, and what a distorted picture of reality their dumbed-down media has been selling them all these years.

And across the Pacific China is demonstrating how an explosive improvement in living standards need not be accompany democracy in the western, liberal sense (not an inch conceded to formal popular sovereignty since Tienanmen, and a new wave of hardline control freaks coming into office in Beijing). Nor need GDP be fuelled by the stimuli from international hegemonic crusading like the USA's capers since 1945. China has grown without much 'defense' spending.

So there was no End of History after the Soviet Union fell: no universal assimilation to the bourgeois parliamentary model of governance that is the ideological facade of international finance capitalism. Instead, a variety of models is being tested, and for the past 20 years the one the West uses has appeared increasingly creaky. (In parts of southern Europe the banksters have already procured the suspension of parliamentary sovereignty as the price of not making countries go bust, so Europe cannot feel superior to the failing American system.)

Still, no doubt Hurricane Sandy will cure all that, like the proverbial whirlwind that assembles an airplane in a junkyard.

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Nov 27, 2012 at 13:03

Rob, thanks for your response. What do you mean by "credit bonds"?

Anyone else know?

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Secret CEO

Nov 27, 2012 at 14:19

Hi Drake

credit bonds typically is shorthand for bonds that are not issued by sovereigns (such as UK gilts or US Treasuries). So bonds issued by corporates or supranational agencies such as the EIB, or by local agencies that do not carry the full faith and credit of the governement. In theory thay have default risk and therefore normally yield more than domestic sovereign debt. With the growth of the emerging market debt markets, these are now included in this category whether they are issued by emerging market sovereigns or corporates. I own both emerging market credit funds and more traditional credit bond funds.

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Nov 27, 2012 at 15:28

Thanks Rob, that's very clear. I am quite bond-averse (perhaps too much so) at the moment because of the worries about bubbles. How does one assess the likely susceptibility of credit bonds to capital depreciation once yields start to tick up?

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