Photo: flickr / Brian Rosner
In his effort to get lawmakers to mobilize, Federal Reserve chairman Ben Bernanke coined the term “fiscal cliff” in a testimony before the House Financial Services Committee on February 29, 2012.Investors consider it to be one of the biggest “tail risks,” or unlikely events, that could cause markets to crater.
But since February, analysts have point to a host of other “cliffs” that threatened to destabilize the markets and the economy.
We’ve rounded up the nine “cliffs” that everyone seems to be talking about the most.
Federal Reserve chairman kicked off the cliff craze on February 29, 2012, when he testified before the House Financial Service Committee, saying: 'Achieving long-run sustainability and providing comfort to the public and the markets that deficits will come under control over a period of time - that's very important for confidence and for creating more support for the recovery. But at the same time, I think you also have to protect the recovery in the near term. Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date.'
BofA analysts Priya Misra and Brian Smedley have issued a warning about another 'cliff' facing markets at the end of the year: the '$1.6 trillion deposit cliff' the U.S. banking system faces when special FDIC insurance provisions expire on December 31, 2012, which could 'cause dislocations within the banking system' and send short-term interest rates on Treasuries negative while simultaneously increasing the funding costs banks face.
Source: BofA Merrill Lynch
In a note entitled The 'cliff' facing US Treasury supply, Societe Generale economist Aneta Markowska wrote: 'We expect that the Fed will continue to buy long-dated Treasury securities beyond the Maturity Extension Program which expires at the end of the year. Maintaining the $45bn/month buying pace through 2013 would reduce net supply of Treasury paper by a further $540bn. Given our fiscal assumptions, this would leave only $281bn of new Treasury debt available to investors. This constitutes a 75% drop from Fed-adjusted supply in FY'2012.'
Source: Societe Generale
'I have cut back on some major holdings, and raised our cash levels to 25% in the asset allocation model I manage...Note that these portfolio moves have nothing to do with the upcoming elections or the fiscal cliff. I agree with what Michael Belkin said at the Big Picture conference: 'People should forget the Fiscal Cliff, this market is all about the Earnings cliff.''
Source: Barry Ritholtz
'European pharmaceutical firms, along with their global counterparts, are seeing the worst effects of the so-called 'patent cliff' this quarter, where patents for drugs expire in major territories but aren't replaced rapidly enough to replace lost revenues. The losses are amplified by austerity programs by major customers such as health care authorities, under pressure to cut spending.'
Source: Wall Street Journal
In a note titled Did You Know Japan's Fiscal Cliff is Right Around the Corner?, BofA's Brooks Thompson writes: 'The current political stalemate has delayed legislation to finance the budget and Japan's coffers are expected to run-out by end of November, which would lead to technical default. I don't want to overly exaggerate, but I'd say this is a much more current and (somewhat) serious reality than the BOJ buying foreign bonds...I have not heard one inquiry about Japan being on the brink of default. We're not talking about 3yrs, 5yrs or 10yrs from now, this could technically happen as early as December.'
Source: BofA Merrill Lynch
'The Global Economic Cliff Is Disappearing...While I am still in the camp that expects subpar global growth, recent indications are that a self-sustaining economic recovery is in place and that the recessionistas are dead wrong. Indeed, among the developed countries, the U.S. is shining...High-frequency economic releases during the past four weeks suggest a slight reacceleration in domestic growth that should continue into 2013 -- of course, this is dependent upon how meaningfully and quickly the fiscal cliff is addressed.'
Source: Doug Kass
This cliff has been resolved by QE3. But before that action was announced, Goldman Sachs chief economist Jan Hatzius wrote, 'The economy now faces a 'monetary cliff' in addition to the 'fiscal cliff' in early 2013. Although we have generally subscribed to the 'stock view' of the Fed's asset purchase programs, we do believe that unconventional easing is subject to 'decay' and that there are some modest 'flow' effects at the very long end of the yield curve. Taken together, these factors make a convincing case for additional easing in early 2013.'
Source: Goldman Sachs
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