The Coming Fiscal Crisis And The Self Directed IRA

We’ve been watching the stock market for the last several weeks and the price of precious metals and we can’t help but be confused at the paradox.

First of all you have the markets continuing to go up as if there are no problems with Europe or within the U.S. It was just 5 or 6 months ago the European crisis looked scary, and yet nothing has changed in Europe other than people committing to print more money.

Here in the U.S. our unemployment situation is not improving. In fact the mainstream media is finally pointing out how dire the jobs situation appears to be. Also, we know that inflation is running much higher than they tell us, but we know its wrong every time we go the store. But, what is a more immediate threat to the markets and investments is the coming fiscal crisis.

At the end of this year, Dec. 31, 2012, Trillions of dollars in tax cuts will expire along with Trillions of tax hikes for Obamacare and Trillions in automatic spending cuts will begin. Yet, with these massive threats on the horizon, the stock market is at a 4 year high.

Let’s just take a simple example how these fiscal issues would impact a single stock. Assume that the stock is $100. Assume that the dividend yield is $10. So, the person or companies that invested in this stock would pay 15% tax on that or $1.50. That leaves a net yield of 8.5%.

Now if the government does not act, the capital gains rates will go to 43.4% (39.6 for the pre-Bush rates plus 3.8% for Obama punishment for being able to invest). So now that same $10 dividend with a 8.5% yield is now yielding 5.66%. That’s a big hit for anyone to take. Big enough that its likely to have investor sensitivity because the investors and the market have already established the fair market price for the stock in relation to the dividend and what the investor requires. We’re betting that the market will need to correct itself by pushing the price of the stock down to compensate for the out of balance conditions caused by the government’s policies.

If our logic is correct, then that means there will have to be some correction forthcoming to offset government inaction. Now there will be those eternal optimists that will claim that the government will not allow these tax hikes to kick in, but that’s a big stretch right now. To date this administration and congress have yet to show that they can come to terms over such large and significant issues.

Because of these fiscal issues, it only makes sense to hedge your investments with your self directed IRA. If you want to be safe, it would seem that everyone should be holding some non-traditional self directed IRA investments in precious metals, real estate or other non-public/market adverse investments.