JP Morgan: How the Cliff Could Impact the Markets

JP Morgan: How the Cliff Could Impact the Markets

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One way to measure the impact of the cliff is as a percentage of GDP.  Given slow growth in the U.S., continuing recession in Europe, and a decline in China’s growth, the austerity provisions of the Budget Control Act of 2011 are like a black cloud hanging over the economy. JP Morgan Asset Manager Michael Cembalest says, “While S&P profits have delinked from growth trends, a 4%+ fiscal hit in 2013 would be a large hurdle for the economy that markets would probably notice.”  He created the table below that shows three scenarios—including the compromises markets assume will be made.  “Anything more than 2% of GDP could be a shock to the system.”

THE FISCAL HILL  While Federal Reserve Chairman Ben Bernanke’s phrase the “fiscal cliff” has been widely embraced as the term to describe the large spending cuts and tax increases scheduled to take effect in early January, some analysts say the “cliff” is really more of a hill or slope. “While the fiscal cliff would be enormous in annual terms, its effect would be cumulative, not immediate, analysts have noted. Households hit by the tax increases might not notice the $10 or $100 missing from their paychecks, even if it would damp their spending over the course of the year,” The New York Time’s Annie Lowrey reports. - Read more at The New York Times

JAMIE DIMON ONCE AGAIN LASHES OUT AT WASHINGTON  JPMorgan Chase CEO Jamie Dimon, a frequent critic of Washington’s handling of the economy and the deficit, was back at it again on Wednesday, complaining in a speech in the nation’s capital that Congress and the Obama administration were mishandling the deficit. Dimon told a Council on Foreign Relations forum that it was “terrible policy” to allow the country to come so close to a fiscal cliff.  He said that “the fear of the unknown…is causing businesses to pull back, which is dampening the economy,” Reported CNN’s Jennifer Liberto. Dimon said that if Congress and the president had enacted the deficit reduction and tax and entitlement reform recommendations of the Bowles-Simpson fiscal commission last year, the U.S. economy would be “booming” now. - Read more at CNN

OVER AND OUT   Peter Schiff, president and CEO of Euro Pacific Capital, said the only way out of a financial catastrophe is to tempt fate by allowing the deep automatic spending cuts and tax increases to take effect early next year and then facing up to the consequences. Schiff said that passing short-term fixes would lead to an even larger problem down the road. "If we address these imbalances and let the economy restructure, people are going to lose their jobs in some sectors, some investors are going to lose money, it's going to feel bad for a lot of people for a short period of time, but it will be very constructive pain.” - Read more at

KICK THE CAN  Slate Magazine’s Matthew Yglesias has a different take on the problem than Peter Schiff and suggests that the simplest way is for Congress and the administraton to negotiate a short-term deal after the election and then figure out a long-term solution later on. “We've hit upon an entirely self-generated problem that Congress could easily solve by simply choosing to kick the can down the road for another 12 or 24 months. A partisan debate about the best approach to deficit reduction would be a great thing to have at some future point when the deficit is a problem, but having it right now is absurd.”

Of course, that approach has been the standard operating procedure on Capitol Hill for years. -  Read more at Slate

SACRIFICING SERVICES FOR SAVINGS    Businesses aren’t the only ones hesitant to invest and expand amid this economic uncertainty. The Washington Post’s Mike DeBonis reports that despite last year’s budget surplus, the District of Columbia government is withholding homeless shelter funding in case a fiscal cliff-related financial crisis strikes.  D.C.  Council members are “pushing to use last year’s surplus on the homeless shortfall, among other social service needs, DeBonis writes,  but it doesn’t look like that is going to happen. “Both Mayor Vincent C. Gray (D) and Council Chairman Phil Mendelson (D) say they intend to keep the money in the bank, in case Congress does in fact go over the ‘fiscal cliff’ and economic matters get very, very bad around here.” - Read more at The Washington Post

MORE EDUCATION CUTS TO COME  Despite politicians’ lip service to improving higher education and making it more accessible, state spending on higher education fell by 7 percent just last year. Things could get a lot worse with federal budget cuts looming. Inside Higher Ed’s Libby Nelson reports that universities reliant on research funding as well as student aid programs are getting nervous about sequestration, which, if not resolved, will result in an automatic 8.2 percent across the board cut in most domestic programs. That would almost certainly reduce funding for basic research and student aid programs. - Read more at Inside HigherEd

State health departments, already operating on sparse funding, are growing concerned about getting hit with massive cuts, which they say will make it difficult to respond to disease emergencies like the current meningitis outbreak that has spread across 10 states. The Washington Post’s Sarah Kliff reports that the Association of State and Territorial Health Officials estimate that state public health budgets could see their federal funding cut between 8 percent and 11 percent. - Read more at The Washington Post

Businesses are already making plans to cope with economic uncertainty. So should you. Reuters’ Linda Stern assembled a list of the best ways to prepare for the looming sequestration cuts and tax increases. Here they are:

Sell winning stocks: Right now, long-term capital gains are taxed at a maximum rate of 15 percent. They have a zero percent tax rate for people with adjusted gross income under $35,350 ($70,700 for couples).

Be charitable: Your charitable deductions could potentially be worth less in the future. It's also a good year to fund a family trust or give a large estate-tax escaping gift to family members, but hurry up: Most estate tax attorneys have been slammed since mid-summer.

Live below your means: Since the temporary payroll tax cut is most likely not going to be extended, your paycheck is likely to go down next year.

Just wait and see:  Since times are uncertain and there’s no telling what Congress will do during the lame duck session, it’s best not to do any dramatic portfolio adjusting just yet. - Read more at Reuters

Brianna Ehley is the former Washington Correspondent for The Fiscal Times. She is currently a reporter on Politico's health care team in Washington, D.C.