Two of the most influential market prognosticators today — Pimco’s Bill Gross and Goldman Sachs’s Jim O’Neill — both warned clients over the weekend of the perils of the coming "fiscal cliff," when tax increases and spending cuts kick in at the end of the year.
“(The) U.S. fiscal cliff (is) deeper than advertised,” said Gross, whose firm oversees $1.9 trillion, in a tweet. “It’s a Grand Canyon. Washington will defer entitlement cuts & raise revenues only marginally.”
O’Neill, chairman of Goldman Sachs Asset Management, warned clients in a note that market momentum was quickly turning down on fears of policy gridlock.
“The world and the U.S.’s own people need Washington, D.C. to be sensible,” wrote O’Neill. “We had a rehearsal of life without a fiscal package in August 2011, and it wasn’t very pleasant.”
The S&P 500 fell more than 2 percent last week after President Obama won re-election, the Democrats retained control of the Senate and Republicans held a majority in the House. That was the exact same political make-up before the election.
In a previous note, “I feared about the consequences of the status quo,” said O’Neill. “It seemed to me that this was not a good outcome for early or detailed progress on fiscal issues.”
O’Neill and Gross are among the latest influential investors or organizations to give dire warnings about the fiscal cliff coming in January. Former President Bush’s tax cuts are set to expire and then automatic spending cuts linked to last summer’s debt ceiling showdown are set to be enacted in a combined action that could cost the economy $600 billion, according to the Congressional Budget Office.
Standard & Poor’s predicted this week an increasing chance the world’s largest economy goes over the fiscal cliff, which will force the credit agency to reassess its outlook.
Read more at CNBC.