Over the next two days our research team, Adam Halantas (Research Analyst) and Chris Conway (Head of Research) will debate whether we are heading over the fiscal cliff. Toady Adam presents his thoughts on why in his opinion we are not heading over the cliff.
WHY WE ARE NOT GOING OVER THE FISCAL CLIFF – Adam Halantas
If you have lived on the planet earth over the past month chances are you have heard about the impending fiscal cliff. The fiscal cliff involves the combination of US spending cuts and tax increases all coming in to effect simultaneously on January 1st, 2013.
Unless you believe the Mayan prophecy about the world ending December 21st, 2012, you should be worried about the fiscal cliff. If the US economy did ‘fall off the cliff’, a US recession would be guaranteed and the follow-on effect to the global economy could be horrific. However, do not fear, we are not going to be diving off the metaphorical cliff, a deal will get done!
Why am I so confident? Let’s look at the players involved in the fiscal cliff saga; we have Wall Street, the media and I guess the politicians are involved.
The media likes nothing more than chaos. Chaos is the backbone of the media industry, the more chaos, the more people buy newspapers, and the more people watch news programs. So it is in their best interest to perpetuate the illusion that there is a possibility that a deal won’t get done.
Now let us look at the next player, Wall Street. Wall Street makes money, that’s what it does, and that’s what it is usually good at. If people believe that there is a chance of another recession, what do they do? They sell their shares which earns investment banks money. This is why Wall Street is happy join in on the fear-mongering.
The last players we need to discuss are the politicians. Unlike the media and Wall Street, politicians are not directly trying to create fear; it’s just the by-product of having two so diametrical opposed political parties. However, both parties do know that a deal needs to be done; they know they can’t keep kicking the proverbial ‘can’ down the road.
In essence both parties do want the same two outcomes, the fiscal cliff to be avoided and for their respective parties to gain credit for any deal achieved. Mark my words, when a deal is reached, one party will win, one party will lose (my money is on Obama). As such neither party is going to want a deal to be done straight away.
Why don’t politicians want a deal to be done as soon as possible? Simple, it would leave the loser little room for political manoeuvring or what is commonly referred to as spin. If a deal is done to early the losing party will have their constituents complaining about how they did not try hard enough and they gave up too much. However, if a deal is reached at the eleventh hour the losing party can say they were acting responsibly, for the best interest of the country.
If you don’t believe me when I say a deal will be done, why not see what markets view on the issue is.
If the market was worried about falling off the cliff, we would see the S&P tanking, the VIX index (aka the fear index) rising and US treasury yields soaring. Instead what have we seen since the issue took prominence after the November 6th US elections?
- -The S&P is only down 10 points or 0.7%
- -The VIX index is actually down 10%
- -10 year US Treasury yields have also actually fallen 13 basis points
These are not indications of a market that is worried; in fact they are more signs of a market being calm.
Overall I am not worried about the fiscal cliff; I believe US politicians will avert the cliff because ultimately the consequences of falling are too dire. My guess is they will have a deal done by Christmas, because let’s face it, no politicians would prefer to be working on a debt deal over being at home with their families. Winston Churchill once said, “You can always count on Americans to do the right thing – after they’ve tried everything else”. I think they have tried everything else and it’s now time to do the right thing.