Fiscal Cliff Update: 'Little Progress Toward A Compromise In Past Ten Days"

Two Fridays ago on November 16, just as AAPL was in danger of plunging below the absolute last support level of $500 after which freefall for it and the entire market begins, a truly unexpected deus ex machina appeared for those still clinging to long stock positions: politicians, in this case John Boehner and Nancy Pelosi, who held a press conference in which they defined the recently launched “Fiscal Cliff” talks as “constructive.

In reality, this appearance was nothing but a photo opportunity for talking heads (as explained in “Risk Ramp on Boehner Banality“), and one which as Nancy Pelosi herself admitted later, served simply to halt what then looked like an assured free fall in the markets. Since then the ongoing rally in stocks and the EURUSD has been predicated on the “constructiveness” of the talks actually being real. Because while a fiscal cliff solution, or rather a compromise – one in which the status quo will be extended and no news spending cuts or major tax hikes will appear, will certainly be implemented, the question is what will take to get the career politicians to bend to even this tiny “compromise” and what is the sequence of events of such a catalyst. As is well-known, Goldman, unlike almost every other sellside group on Wall Street, except for Morgan Stanley, still sees a tumble in the S&P to unchanged for the year levels as being the key driver that forces DC to cobble a deal (to be sure, Goldman then expects stocks to surge to over 1500 for 2013).

Judging by the latest update from Reuters, Goldman will likely be right, if only in the short term. As Reuters admits, ” U.S. lawmakers have made little progress in the last 10 days toward a compromise to avoid the harsh tax increases and government spending cuts scheduled for Jan. 1, a senior Democratic senator said on Sunday.” That this update comes after the “big” market swoon into the recent lows from November 16, is certainly cause for alarm, because it means that at least one more violent market whipsaw to the downside will have to take place before there is any cliff progress to report.

From Reuters:

 U.S. lawmakers have made little progress in the last 10 days toward a compromise to avoid the harsh tax increases and government spending cuts scheduled for Jan. 1, a senior Democratic senator said on Sunday.


“Unfortunately, for the last 10 days, with the House and Congress gone for the Thanksgiving recess … much progress hasn’t been made,” Dick Durbin, the No. 2 Senate Democrat, told ABC’s “This Week” program.


A deadline is looming. Absent action by lawmakers and President Barack Obama, roughly $600 billion in tax increases and spending cuts will start to hit households and companies in early January.


Durbin said Democrats are willing to allow small changes to parts of these entitlement programs, including public health insurance programs for the elderly and poor, but the Social Security government pension program should not be on the table.


“Bring entitlement reform into the conversation. Social Security, set (it) aside,” Durbin said.

In other words, our assessment of the Boehner-Pelosi photo-op was once again spot on.

Remember: politicians are never in a rush to “resolve” something unless real money loss – either their own or of their primary lobbyists – is at stake. And Wall Street will make sure of just that. It will also be sure to buy ahead of everyone else once the real can kicking exercise du jour is completed. At least until the realization that nothing has been actually resolved kicks in. That bridge will be crossed in due course.

But first a far more looming bridge is that of the Cliff, on whose crossing there has been no progress made, for which Obama has said will demand double the previously expected amount in tax hikes ($1.6 trillion over ten years, or enough to fund the US budget deficit for one month), and which will collapse very soon, as there are now just 12 full sessions of Congress until the end of the year.

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