Tags: Spiro | rally | misplaced

Strategist Spiro: Market Rally ‘Misplaced’

Thursday, 03 Jan 2013 11:05 AM

By Michael Kling

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The market rally following Washington's fiscal cliff deal was "totally misplaced," and the coming debt ceiling battle will bring frightening volatility, said Nicholas Spiro, managing director at Spiro Sovereign Strategy.

The rally, he told CNBC , "shows how low we've actually sunk in investor expectations when the market rallies just on 'muddling through.' I disagree completely with those that argue that most of the uncertainty has been lifted."

The federal government has already reached its debt limit, and as a stopgap, the Treasury Department is using “extraordinary measures” to borrow $200 billion, giving lawmakers about two months to raise the official limit.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

Congress will raise the debt ceiling at the last minute, but investors should expect plenty of volatility before then, Spiro told CNBC, saying the debt ceiling battle could bring a "very scary surprise."

"I believe that the Republicans will fall into line at the eleventh hour as they have already caved over a relatively minor piece, but it will be extremely messy and there should be a lot of volatility expected."

Although the country avoided the fiscal cliff with extensive tax increases, it has fallen off a political cliff due to its “dysfunctional political system,” he said. It's stuck in a quagmire of partisan warfare, and House Speaker John Boehner, R-Ohio, cannot control his party, while Republicans are unwilling to compromise.

"They're now going to be even more emboldened," Spiro told CNBC.

Other experts agree the rally will probably be short lived.

Markets were relieved that Washington avoided the worst-case scenario, but it was a false relief because the long-term deficit problem was not solved, Doug Cote, a strategist with ING Investment Management U.S., told the Los Angeles Times.

"There's still plenty of uncertainty, unfortunately, that remains," said John Engler, president of the Business Roundtable, according to the Times.

"You can certainly say the potential for some harm was averted, but the potential for greater certainty still lies ahead."

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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