What Forces a Fiscal Cliff Deal?

 | Nov 12, 2012 | 7:15 AM EST  | Comments
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What forces the hands of Congress and the president to make a budget deal before taxes shoot up and spending slams down? What inputs do they need in Washington?

I see three pressure points. The first is a precipitous decline in the stock market. We have two precedents for the market to matter, the TARP vote and the deal in Europe. After TARP initially failed the market took a real hammering and that was because sellers knew they had to get out before the banking system collapsed. You have heard a series of banking CEOs say their institutions wouldn't have collapsed if TARP had failed to pass. That's nonsense. Short sellers controlled the market and they could bring stocks down, which then caused ratings agencies to panic, which then stopped funding to banks and then brought collapses. The bank CEOs couldn't stop that trend. They should stop pretending they did. Congress swung into action only after the hideous selloff.

Second is Europe. There's no secret to the when the central bank got a deal to move along: when the stock markets collapsed and the bank stocks look like they would be rolled.

So, my simple take is a 1,000-2,000 point bone-crusher comes first and a deal later. Chances: 50/50.

The second? The beginning of a shoot up in employment claims as everyone from the biggest executives to the smallest of small businessmen know it is time to fire. Why not? We rewarded executives who "saw it coming first" with higher stock prices and "saw it coming" meant who fired the most the fastest. You will see that from the claims. I don't have to put odds on that. The game is already happening.  

Third, in order to stop the fiscal cliff jump CEOs who contributed to the Romney campaign and to opponents of the Democrats recognize they backed losers and actually asked the Congresspeople they invested in to make a deal rather than have a recession that will kill profits, lower stock prices and maybe impact CEO compensation. This may not happen because no. 2 says they can slash hiring and still do well personally and with their stocks, but there has to be some executives who say they are not going to continue to front losing, divisive leaders. Of course, the Tea Party people are willing to crucify hiring upon a cross of 15% tax rates for hedge fund managers, perhaps the greatest bit of Grover Norquist inspired insanity yet. But as a former hedge fund manager who paid ordinary income I could see selfish hedge funds really funding financial Armageddon because they can get short and make up the lower tax rate that way. Oh come on, that's not cynical, that's good business. The prospects of business leaders actually helping to get a deal done has increased to 50% also simply because they are money men and backing losers turned out to be a really bad strategy.

So, there's the players. That's the gameplan. I don't like the odds because issue two has already started and you can gift wrap a 2013 recession come no deal by Christmas.

That means staying lean, investing with companies that don't have to rely on the U.S. consumer, who will be hammered and just waiting for the punishment from having Washington sink into partisan politics instead of rising above to get a deal done.

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