Breakout

Traders Are Absolutely Prepared to Crush Stocks if Fiscal Cliff Is Unresolved: Colas

Breakout

We call it the fiscal cliff, but really it's a $5 trillion game of chicken, and neither side appears to be budging. The White House is ''absolutely prepared" to allow economically ruinous tax increases and budget cuts to take place on January 1, while Republican anti-tax stalwart Grover Norquist now thinks the cliff dive is inevitable.

While newsrooms across the country are consumed with the minute-to-minute developments, Wall Street has remained oddly calm and is sticking with its consensus that a deal will ultimately get done.

"Wall Street understands what negotiations look like," says Nick Colas, chief market strategist at ConvergEx Group, who predicts the wrangling has to go down to the final hours, even though the stakes are enormous. "There's nothing else that matters nearly as much. This is, in fact, a critical issue. It is the difference between the potential for expansion, economically, next year and a sure recession."

While the tone and tenor of the talks appears to be worsening and the likelihood of a deal seems to be contracting with each passing day, Colas is not all that worried yet and says it's just part of the process. "You've got to make your opponent think you're crazy enough to do the unexpected," he says.

That's not to say investors don't care. In fact, Colas thinks the markets will show lawmakers just how much they really do care in a matter of days. "Unfortunately, what happens is Wall Street usually has to put a warning shot across the bow of Congress and the President in order to get things done. So that will probably happen next week," Colas predicts.If that happens, the dynamics of December could make for an outsized sell-off, Colas explains, since there's not a lot of volume and people are either in vacation mode or heading out of town. "Decembers are really a bad time to have a large, exogenous event like this kind of failure," he says, adding that any type of shock is going to have a "disproportionate effect." Which, if you think about it, might just be what's needed to break the impasse.

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