Crossbridge Capital’s Manish Singh asks: Who’s afraid of the fiscal cliff?
Manish Singh, head of Investment Services at Crossbridge Capital, takes the view that the US fiscal cliff poses a great threat to all investors.
Who is afraid of the fiscal cliff?
The simple answer is we should all be. We are sitting in a car which is being driven by US lawmakers who have hardly made any laws or passed a budget for the whole term of this 112th Congress. So far, the inaction of the Congress and the failure of the President to get things done have produced an unbearable ennui.
Last month, Federal Reserve bank Chairman Ben Bernanke delivered QEternity (open ended Quantitative easing of $40bn bond purchases per month). At the press conference that followed, he reminded us of the significance of going over this cliff:
“If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency.”
A quick reminder of what is this ‘fiscal cliff’ – based on current law, US fiscal policy is due to tighten by over $600bn at the start of 2013 – the equivalent of around 4% of US GDP as Bush era income tax cuts expire and a number of automatic spending cuts kick in.
If the history of this Congress is any guidance – passage of TARP (Troubled Asset Relief Program), raising the debt ceiling, bank bailouts and auto bailouts, bickering aside at the eleventh hour, a ‘fiscal cliff’ will be averted.
Post the Presidential election in November, irrespective of the result, both parties face the inevitable prospect of living with each other for four more years and will be judged by voters on their response to dealing with this ‘fiscal cliff’. Neither side would like to start a new term in Congress by sending the US over the cliff and held responsible for it. Meanwhile, the current Congress has quietly agreed to fund the government through March 31; so there will be no threats of a government shutdown on December 31.
Here in Europe, on any given day you can do a full round (or two) of buying and selling Spanish debt on speculation alone. Like we saw last week – SELL because Spanish banks will need larger than estimated amount of help; BUY because Spain will ask for a bailout anytime now; SELL because they will be subject to austerity; BUY because that will reduce their borrowing and debt; BUY again as the headlines flashed “Spanish banks beat cash injection expectations”.
Last week, both Spain and France presented their budgets – more austerity and more hard times are predicted. President Francois Hollande of France has implemented his 75% tax rate. It’s likely the boundaries of South Kensington will have to be extended across the river to Battersea to cope with the influx from France!
The Spanish bond yields are hurting again but PM Mariano Rajoy is refusing to submit and seek a bailout. The chances of Spain making it through without needing a bailout are slim. Rajoy should seek the bailout, the ECB would then buy Spanish bonds and the European crisis would move beyond talk of sovereign yields to focus on growth and much needed reform.
As summer gives way to the autumn chill, the street protests are back in peripheral Europe. A people’s revolt against European policymaker’s plans is the single biggest ‘risk factor’ that could derail everything. Somebody said if Greece is the fuse then Spain is the bomb. Our best hope is for this bomb to be diffused soon.