InTrade may have gotten the Obamacare outcome horribly wrong, but it was spot on in predicting the Obama presidential victory. And if it has continued its accurately predictive ways, it will mean a lot of pain is in store for the market (if not so much the President) very shortly, because the online betting service, now only accessible to offshore based US residents just saw odds on a debt ceiling deal plunge to all time lows of 10% earlier today, before rebounding weakly to 16%. As a reminder, Harry Reid has said on numerous occasions that there will be no Fiscal Cliff resolution without a favorable debt ceiling outcome, which therefore means that according to InTrade the odds of a Fiscal Cliff getting done in 2012 have plunged to 16%, and the probability of a market tumble, as the cliff moving over to 2013 means a cornucopia of unintended consequences, is logically (1-16%).
Furthermore, in his press conference today, Bernanke virtually assured just this outcome when he said that while the Fed has few tools to deal with sliding off the Fiscal Cliff, it can increase the QE amount by a “small amount” which is the only loophole any politicians needs. And with the example set with QE3, when Bernanke effectively responded to what was a political demand with Chuck Schumer’s infamous “get to work Mr. Chairman, every single career politician will now lean on Bernanke to provide just that “small amount” to keep stocks from tanking, an outcome even the chairman said he would like to avoid, but one he acknowledged may be necessary to break the Congressional hypnotic trance.
Finally, all of this was predicted here a month ago, right after the presidential election, and just when the fiscal cliff was starting to become the problem. From November 13:
“it is a certainty that in the 15 remaining days it is expected to be session it will get nothing done. Which means, that once again, it will be up to the market, just like last August, just like October of 2008, to implode and to shock Congress into awakening and coming up with a compromise of sorts. Only this time, now that Bernanke has shown he will “get to work” at a moment’s notice, the impetus to do anything as a result of even a market plunge will be far less. After all why lose face, and put your career in jeopardy when there is the Fed which, supposedly, can offset a market crash, courtesy of the shining example set by Chuck Schumer.”