‘Fiscal Cliff’ Looms Over Campaign Climax

Some of the largest U.S. asset managers and pension funds issued an urgent warning over America's looming budget crisis, underlining concern in the markets of a damaging political stand-off in the event of a narrow election victory for Barack Obama.

Romney Still Trails Obama in 2 Key Swing States: Polls
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Even as Mr. Obama and Mitt Romney made their last pitches to voters, the investors called on Congress to do a deal to avert the"fiscal cliff," $600 billion in spending cuts and tax rises set to take effect on Jan. 1 if changes to the law are not agreed.

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Such fiscal austerity could push the economy into a recession next year, the Congressional Budget Office and the Federal Reserve have warned.

"America is facing an urgent crisis, barely discussed during the fall's election campaign," said the group of investors led by BlackRock and joined by pension systems from Florida, Utah, Texas, and Illinois, in full-page advertisements placed in leading US newspapers on Monday.

"Every day we go without a resolution to the fiscal cliff will erode confidence," said Larry Fink, head of BlackRock which oversees $3.6 trillion for investors. He said U.S. companies held $1.7 trillion in cash, "a huge reservoir of money standing by to be put back into the economy" if confidence improves, if there was a fix that is seen as "tangible and credible."

Opinion polls in key swing states showed a slight edge for Mr. Obama over his Republican challenger ahead of Tuesday's vote. The close election and uncertain prospects for negotiations over the impending budget crisis are overshadowing the performance of markets and more optimistic recent economic data.

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The S&P 500 has dipped nearly 4 percent from its high in September. U.S. government bond yields have fallen, as traders anticipate that a win for Mr. Obama and further gridlock in Washington will shrink the chances of swift agreement on tax and spending. It is also possible that Congress will simply defer the January deadline until later in 2013.

"It's a 'fiscal cliff' trade," said John Brady, managing director of global futures at RJ O'Brien & Associates. "If the polls are correct and President Obama wins, markets will become worried about how successful he and Congress will be in terms of avoiding it."

U.S. companies have rushed to sell corporate bonds in recent days and lock in low yields in case sentiment turns after the election, with $24 billion in deals last week and Abbott Labs sold $14.7 billion in debt on Monday, the biggest single company issue this year.

"People believe that if Romney is elected there is a greater chance of more volatility and higher bond yields," said Ashish Shah, head of global credit investments at AllianceBernstein.

BlackRock, which organized and paid for the ads, said that the "fiscal cliff" was the greatest concern of investors polled in October who collectively manage almost $5 trillion in assets.

The group has used the tactic before, publishing an "open letter to America's elected leaders" in July 2011 that urged Washington to avert a crisis by raising the debt ceiling. In both letters, the group invoked its responsibility as custodians of savings for firefighters and teachers, nurses, factory workers, and entrepreneurs.

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Some large public pension funds that declined to sign the letter expressed surprise at its timing, the day before the election. The Council of Institutional Investors is scheduled to hold a conference call on Thursday to discuss issues arising from the election.

In October, chief executives of 15 large financial institutions, including Goldman Sachs, Citigroup, State Street, and MetLife signed a similar letter warning that "the consequences of inaction ... would be very grave."

Meanwhile investors are attempting to position themselves in different asset classes for an uncertain outcome. "Romney's policy is dollar-bullish, while Obama's re-election means the status quo: dovish monetary and expansionary fiscal policy and so dollar-bearish," says James Kwok, head of currency management at Amundi.