BOSTON (TheStreet) -- A slide in U.S. stocks, more debt downgrades and higher borrowing costs await investors if the so-called Super Committee fails to reach a bipartisan agreement on deficit cuts, says Jeffrey Sica, head of Morristown, N.J.-based Sica Wealth Management.
Sica, whose firm manages about $1 billion, already expected the committee to fail when it was formed after the rancorous debt-ceiling debate in August. He's put his money where his mouth is: The professional investor cut his equity exposure to zero and is betting on a decline in stocks and Treasuries while maintaining a high level of cash.
|Super Committee Co-Chair John Kerry (D-Mass.)|
"That's the only place that's safe to be right now," Sica says. "Anyone who thinks otherwise is fooling themselves or trying to take the market short-term, which has risks of its own. You're guessing on the direction day by day, and I wouldn't want to be in that position."Sica, a former managing director for Wells Fargo, says the Super Committee was created as an "illusion of progress." Today is the deadline for the Congressional Budget Office to receive information on $1.2 trillion in proposed cuts from the Super Committee, whose deadline for reaching a deal is Wednesday. "The government does not have the answer," he says. "They have completely failed in their ability to contain our deficit and they have undermined the average investor who had faith in the market." Sica lays out a doomsday-like scenario for investors after this latest political debacle: The U.S. deficit has increased by $500 billion since the formation of the Super Committee three months ago. While gross domestic product in the U.S. may be increasing by more than 2%, the debt-to-GDP ratio is climbing at a faster rate. "As long as they keep raising the debt ceiling, if they don't get GDP numbers that consistently exceed expectations, there's no relevance," Sica says. "You would need to see astronomical growth in GDP." Investors will get the first revision to third-quarter GDP on Tuesday, with economists predicting a 2.4% annualized rate. Ballooning debt means credit-rating agencies Moody's (MCO) and Fitch Ratings will downgrade U.S. debt to AA+ from AAA, much like Standard & Poor's did in August. If the debt-to-GDP ratio grows to 120% as Sica predicts, it would make an economic recovery highly unlikely for the next three years. "It creates a very strong possibility of a prolonged recession that will be very difficult to dig out of," Sica says. "The compounding effect is very evident now."
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