11/9/12 – Day Two of the New Crisis

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 9, 2012 11:46:29 AM

and tagged Fiscal Cliff, Market Updates

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Once again, the papers lead with the fiscal cliff: “Pressure Rises on Fiscal Crisis” from the front page of the Wall Street Journal, “Congress Sees Rising Urgency on Fiscal Deal” from the New York Times, and “Schumer appeals to business on the fiscal cliff” in the Financial Times.

The good news is that everyone gets it, and both parties seem to feel a sense of urgency in dealing with this. Speaker Boehner has gone on record saying that additional revenue could be doable—which might be a concession, or might not. The President has been quoted saying he doesn’t think we will go off the cliff, but he hasn’t said why not.

The process will be long and bumpy, and the debt ceiling—which is growing closer—will certainly add more complexity to the mix. Both sides are reaching out to the other side’s allies (see the FT headline) in an effort to bolster their own negotiating power.

As a citizen, I have to say that, while it’s encouraging that everyone is moving on this, it’s also depressing that a problem so big, where we know the solution will ultimately fall somewhere in the middle, can nevertheless be dragged out to the very end, with a real possibility of failure. Wouldn’t it be great to have a more efficient government?

Every time I think that, though, China comes up in the headlines again and I reconsider. Democracy, after all, is the worst system of government, except for all the others. China is now in the midst of its leadership transition, just as we are, but consider the following points:

First, China doesn’t even know how many leaders it will have—seven or nine. Imagine not knowing how many Supreme Court justices we’d have, for example.

Second, one of the leading candidates disappeared for weeks. Imagine a presidential candidate vanishing for several weeks, then reappearing as if nothing had happened. Would that help his polling?

Third, a leading candidate was purged at the last minute, and his fate remains uncertain. John Edwards aside, that wouldn’t happen here.

And finally, whoever ends up on the Politburo owes his legitimacy to his connections and remains subject to elder leaders in the background, as we have just seen.

In the end, those of us in the cheap seats of the political theater will just have to wait and see how the show plays out. But if we don’t like it, at least we can vote with our feet. Expect more volatility ahead as the press continues to focus on this. Unless the politicians deliver in short order—which they can’t, and in any event have no incentive to do—the situation will become bigger and scarier by the day.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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