The standard view on Wall Street is that we will somehow avoid going over the \u201cFiscal Cliff.\u201d\u00a0 That may ultimately prove to be true, but investors should proceed on the assumption\u00a0we could well go over the cliff and will at least come perilously close \u2014 close enough to damage the confidence of investors, businesses, and consumers.<\/p>\n
Frankly, the main reason for Wall Street\u2019s complacency about the cliff is that it (like a decline in housing prices in 2008!) is \u201ctoo awful to contemplate\u201d \u2013\u00a0a U.S. recession while the rest of the world is already in a slump. But if\u00a0one considers how Washington actually handles these issues, there is little reason for optimism.\u00a0<\/em> <\/strong>This is demonstrated by The Price of Politics<\/strong>,\u00a0Bob Woodward\u2019s excruciatingly detailed, meeting-by-meeting, phone call-by-phone call account of the 2011 fiscal negotiations between Congress and the White House.\u00a0 Salient highlights:<\/p>\n When it comes to cliff-avoidance, this dreary record shows, there is no reason for optimism.\u00a0 And even if we do avoid the cliff, another debt ceiling limit fight looms<\/strong> in January or February.\u00a0 Obama will be very angry about having to deal with this again; in 2011 he claimed it was effectively unconstitutional because it undermined his authority as President.\u00a0 And Obama can now afford to be an even tougher negotiator because, unlike in 2011, he does not need a strong economy to help him win reelection.\u00a0 Some Democrats are willing to go over the cliff and blame the resulting economic damage\u00a0on\u00a0Republicans.\u00a0 In July Senator Patty Murray\u00a0said, \u201cIf we can\u2019t get a good deal \u2013 a balanced deal that calls on the wealthy to pay their fair share \u2013 then I will absolutely continue this debate into 2013, rather than lock in a long-term deal this year that throws middle-class families under the bus.\u201d<\/p>\n Keep in mind that, on\u00a0top of all this “uncertainty,” fiscal policy very likely will tighten early next year<\/strong> at a time when Europe is in recession and emerging markets are sluggish.\u00a0 The payroll tax cut will probably end and Obamacare taxes on high earners will kick in.\u00a0\u00a0So profits, which slightly declined year\/year in Q3, are not likely to rise much in 2013; S&P EPS of $106, representing a gain of 4-5% is a reasonable number.\u00a0 But if we really go over the cliff and have a recession\u00a0$95-100 is likely.\u00a0 This risk will create extreme market volatility over the next few months.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" The standard view on Wall Street is that we will somehow avoid going over the \u201cFiscal Cliff.\u201d\u00a0 That may ultimately prove to be true, but investors should proceed on the assumption\u00a0we could well go over the cliff and will at … Continue reading \n