IGNORE ‘FISCAL CLIFF’ AT YOUR OWN PERIL

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The markets are in a party mode and have forgotten the approaching dark cloud of the “fiscal cliff.”

The fiscal cliff refers to the expiration of Bush tax cuts and simultaneous significant reduction in government spending in the United States at the end of the year.

The Congressional Budget Office (CBO) has estimated budget reductions in 2013 as shown in the chart.

 

 

Various estimates of the impact of the fiscal cliff on the GDP range from a reduction of 3% to 4.5% in 2013. The American economy is growing in the range of 1.5% to 2%. If the fiscal cliff were to materialize, the GDP may shrink by as much as 3%. Such shrinkage means another recession.

Our models are projecting that a 3% recession will lead to DJIA dipping under 10,000. Under this scenario, the Dow Jones ETF DIA will dip to under $100, the S&P 500 ETF SPY will move under $106, the PowerShares QQQ ETF QQQ will slip under $51, and the Russell 2000 ETF IWM will decline under $61.

Since gold and silver have become risk assets, a recession will be a major risk-off phase. Gold may easily dip to $1,200 and silver to $20. Under this scenario, the SPDR Gold ETF GLD will dip under $11.60 and the iShares Silver ETF SLV will dip under $19.

This bond ETF TLT will spike and inverse bond ETFs like ProShares UltraShort TBT and ProShares 20+ TBF will hit all-time lows.

Of course the markets have dismissed the impending doom believing there will be a compromise.

Both President Barack Obama and Republican leaders have made it clear that a compromise isn’t likely before the election.

See also  WEEKLY STOCK MARKET DIGEST: AI FRENZY COOLS, TESLA BEARS WIN, STOCK MARKET SENTIMENT AT EXTREME

Now the hopes are on the lame duck session of the Congress after the election.

Bulls contend that even if Congress doesn’t act, there is a Bernanke put, i.e., the Federal Reserve will act to save the economy…Read more at MarketWatch

 

 

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