Three Possibilties for the Economy

On Wall St., the managers of huge money manager BlackRock Inc. (NYSE: BLK) are often considered the smartest guys in the room. Their ability to successfully manage high returns are legendary. That gives some real weight to the forecasts of their portfolio managers. But the validity of the brand new BlackRock forecasts about the fiscal cliff and the election are undermined because they are so mixed and incomplete as to be useless.

BlackRock executives believe the economy will take one of three paths. The first is what they call the “sky dive.” This involves the reelection of the president and then a bitter fight with Congress over the fate of America’s debt. The Fed could intervene to cushion the crash, but the crash would happen nonetheless, with the probable result of a crippled economy in 2013.

The next possibility BlackRock managers believe is what they call the “bungee jump.” Romney would be elected and control of Congress would go to the Republicans. The basis of this forecast is that the markets would expect tax cuts to be put back in place in early 2013. The Federal Reserve could curtail its efforts to jump-start economic activity. All would be well.

The final possibility BlackRock executives call the “hard stop.” Lawmakers would extend most programs in return for some spending cuts. They would then work toward a comprehensive budget deal in mid-2013. Markets likely would view this set of actions as so temporary that the fright over whether the Democrats or Republics would prevail would further damage markets, and probably the overall economy.

The weakness of any projections that offer only a few options is that many more are possible. BlackRock management’s view of the world does not take into account a potentially sharp rise in energy prices or the effects of a deep recession in Europe. The view also ignores what will happen to global gross domestic product if China’s economic expansion slows to 6% or even 5%. Also not part of the BlackRock range of possibilities is what will happen if food prices continue to rise or the effects of a war in the Middle East, even if it is a “small one” by the standards of armed conflicts.

Three choices are no choices at all, if many of the reasons for changes in the economy are left unmeasured.

Douglas A. McIntyre