BlackRock Analysts: Fiscal Cliff Is a ‘Ticking Time Bomb’

Wednesday, 10 Oct 2012 08:05 AM

By Dan Weil

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If the United States falls off its fiscal cliff — the spending cuts and tax hikes that will be implemented if the government doesn’t act before Jan. 1 — the results could be devastating.

But the financial markets are rolling along as if there’s nothing but sunny skies ahead, with both stocks and bonds near record highs.

BlackRock analysts say that’s a mistake. “Markets have not priced in the fiscal cliff and assume QE Infinity [the third round of quantitative easing] will drown out other factors,” they write in a new report.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

“Markets appear to underestimate the potential for panic in the run-up to the cliff, the possibility of the nation falling off the edge and the cliff’s impact on economic growth.”

If the government stands pat, the spending cuts and tax increase could trim gross domestic product by 5 percent next year, BlackRock says. “In the unlikely event Congress does not raise the debt ceiling, the impact could be even worse.”

More likely is a tempered version of the tax hikes and spending reductions that would still slash 2 percent off GDP, nullifying the Fed’s quantitative easing, the analysts say.

They aren’t the only ones concerned.

"The fiscal cliff is a ticking time bomb, and the success or failure of this election will be whether the new crew will be able to diffuse it," Phil Orlando, chief equity market strategist at Federated Investors, tells CNNMoney. "The Fed is doing all that it can, but even that's not enough."

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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