The Scariest Fiscal Cliff Chart — And Why Investors May Be Walking Into A Disaster

Joe Weisenthal | Aug. 18, 2012, 10:54 AM

Of all the charts we’ve seen surrounding the so-called Fiscal Cliff, this might be the scariest one we’ve seen. It’s from a Citi survey of clients taken a couple weeks ago.

 

fiscal cliff

Citi

 

It’s not even close. The belief that all of the spending cuts and tax hikes will get pushed off is overwhelmingly what investors expect to happen.

The best reason to be optimistic is that recent history shows us that in the end, Congress staves off disaster. Certainly the debt ceiling negotiations last summer, even though they went to the brink, showed that the two parties can come together and avoid a catastrophe.

But this is not the debt ceiling all over again, in part because failure to reach an agreement would not be a catastrophe. It would just be really bad. And the lack of Mutually Assured Destruction means an agreement is not a sure thing.

In his weekend US Macro Dashboard note, Morgan Stanley‘s chief economist Vincent Reinhart suggests that the odds of a deal not getting struck have grown since Paul Ryan was picked.

Contesting the election on big fiscal principles, however, also raises the chance of a punishing 2013 outcome.  Individual election victors will rightly view themselves as having a clear mandate from voters who had been given a clear choice.  But what happens if, in the aggregate, voters opt for a divided government?  If the control of the White House and the Congress continues to be split, it might be even harder to compromise next year, even compared to this year’s polarized results.

Ryan aside, investors may also be underestimating the degree to which Democrats would be fine with the country completely flying off the fiscal cliff.

Remember, one half of it is the Bush tax cuts (the Bush tax cuts which Democrats have no allegiance to) and spending cuts that hit defense, but don’t hit entitlements.

So not only does the fiscal cliff not have the Mutually Assured Destruction angle (because unlike with the debt ceiling fight, the Full Faith and Credit of the Republic probably isn’t at risk), it’s not even clear that one party would be particularly bothered by a complete sail off (especially if that party were out of The White House come November).

Read more: http://www.businessinsider.com/investor-complacency-around-the-fiscal-cliff-2012-8#ixzz23y8hnpT5

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