From fianancial advise to next financial crisis

This is a comprehensible example what the fiscal cliff could affect investor, according to Bloomberg: an investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds -- after long-term capital gain taxes -- of $88. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise at least 9 percent for an investor to be better off selling in 2013. Furthermore, assets that generate long-term capital gains aren’t confined to stocks. Owners of real estate and business organized as S corporations, partnerships and limited liability companies and stock options can get capital gains treatment when they sell.

Further, “We have a number of people contemplating selling their businesses,” said Jere Doyle, senior wealth strategist at New York-based BNY Mellon Wealth Management. “They’re trying to jam it through before year-end to take advantage of the capital gains rates.”

Would you sell your $100 stock or company because of the $7 dollar more tax and the $100 would go to $120? Obviously, these financial advisors recommended so. On their stand point, it is true that you can certainly save a few bucks when so many IF's come true:

• IF congress doesn't act
• IF congress doesn't act enough
• IF economical recovery can drive return higher
• IF you can find $100 but not $98 to sell it now 
• IF the $7 dollars is the only affect on investment (do you mind?)
• IF inflation reaches 5%, would that offset the $7?
• IF interest rates hike, what happen?
• many more ...

These are always ridiculous advise often put on TV, newspapers, seminars. Tax smart, tax planning, tax this and tax that, the theme financial advisors propose to clients. The message is to sell.

Hopefully people listen with great deal of reservation. Indeed, I think the problem should be better answered by economists instead of financial advisors when coming to tax preparation. Think about these questions:

• How budget deficit was created?
• How budge deficit was/is handled?
• Is the $7 less earnings the only thing would happen?
• Is the deficit problem the unique problem to us? 
• More important, would the budget deficit become budget crisis or dollar crisis?

These are serious questions attempted to be answered in the book, Profiting from the World's Economic Crisis, by Bud Conrad. Conrad is the chief economist at Casey Research and a futures trader according to the book biography. He holds an MBA and electrical engineering degree.  The book has a theme of the demise of the US dollar and tries to point to alternatives to the dollar. The conclusion is drawn from the deficit history, lessons from the Great Depression, Germany hyperinflation and Japan's stagnation, and many others. Eventually the book leads to conclusion of the demise of dollar and investment protection. This is a serious work the author tries to answer, much like books before 2008 crisis people tried to find out the next burst bubble.

However, like advise from financial advisors, not recommend losing analytical sense while reading. For example, unlike Conrad proposed, gold may not be an valid inflation and alternative to the US dollar. Why? Because, our economy scale is much bigger than all gold reserve can gauge. Currencies aren't back by gold reserves in central banks. Currency balance has been developed in creative ways to tackle financial crisis around the world. No one had heard what central bank swap lines is before. It reached to a peak in 2008, trying to maintain easy availability of the US dollar by influential central banks. The outcome is stronger US dollar. Thus, the US dollar is not only affected by domestic economical condition but also globally.

With disagreement, the book is still a good read, especially supporting documents, charts, and references are from serious authorities. Arguably the book may be better categorized as a trading book instead of an economical book, but some models and conclusion are worth going over in the next few posts.