Yes, it does all seem crazy. And while there are still two more trading days after today, the logical question to ask is "if this is austerity on the horizon, why do markets seem to like it so much?"
Think about it like this. We know that we wanted Europe to put through pretty much what going over the fiscal cliff does, and those of us who think that growth is important don't like their plans. There's no growth stimulus. Austerity has led to lower interest rates, but those rates are really a function of central bank intervention.
Can our stock market really like a plan that has no growth kickers in it? So, logically we should be going down, not up.
Maybe the market is totally oblivious, and while we can make judgments that the market likes the fiscal cliff from the action, we can also presume the market doesn't know what it is talking about except for retail, which has been rolling over. But that's a tough fiscal-cliff-to-blame call because retail's been weak the whole season, a combination of ultra-warm weather, worries about the cliff and Superstorm Sandy.
This leads me to the most likely scenario: the market likes the coming together that we will see after we go over the cliff with the Republicans fighting vigorously for tax cuts and winning. That's why the sellers aren't dominating.
Makes sense. Grover Norquist really wants that. Some say he wanted the Plan B, but that's just nonsense. He wants nothing but tax cutting and that's what he can bargain with the president on through his committed minions. Turns out he was the most powerful man in Washington after all. Always will be, as long as the GOP owns the house.
Also, lets not forget how much the market is in love with gridlock. We know the next battle will be the debt ceiling and that will create another push for still smaller government and more rancor, which, while distracting, should no longer scare us because that's about debt downgrades that don't seem to matter so much anymore.
So, here's the bottom line. The market doesn't fear the cliff because good things come off it -- middle class tax relief -- and the rest is the long-sought agenda of fiscal conservatives everywhere.
We all acknowledge that a recession will be caused by the cliff if we don't get middle class tax relief, but if we do the fact that we didn't sell off big says that we will get it.
Those who don't believe in this thesis should be selling or shorting retail. The numbers are too high.
That's the best hedge I know.
