12/3/12 – And One Step Back?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 3, 2012 4:55:44 AM

and tagged Fiscal Cliff, Politics and the Economy

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Sort of. The White House has made an initial fiscal cliff proposal, which the Republicans have rejected out of hand. The headlines are portraying the Republican dismissal of the proposal as a problem, but the markets seem to be taking it in stride. I suspect the markets are right on this one.

To truly assess the situation, we need to evaluate the reliability of the news coverage. The different ideological takes of the papers are becoming more apparent, particularly today. The underlying dynamic of the news cycle is also worth considering. Both of these factors affect what we will be seeing over the next month as the clock ticks down.

Let’s look at the news cycle first. Just as with the election, where you could predictably chart the “Romney up/Obama down” and “Obama up/Romney down” cycle, we now have the same pattern in the fiscal cliff coverage. Last week was optimism, this week is pessimism. I expect we will soon see optimistic reports again about how the parties are coming together after all.

The difference in coverage between papers is also becoming more stark. The Wall Street Journal (WSJ) had “Obama’s Cliff Offer Spurned” on the front page, while the New York Times (NYT) put the fiscal cliff story back on page A23. Instead, the NYT featured a long front-page story titled “Complaints Aside, Most Face Lower Tax Burden Than in the Reagan ’80s.” The Financial Times (FT) also included a piece on Boehner’s rejection of Obama’s proposal, but it was a small teaser below the fold. Clearly, both stories are important, but the difference in focus (the negotiations in the financial papers and a detailed article supporting what is essentially the Democrats’ position in the NYT) shows what each paper’s take is.

On both sides, though, the story is essentially that there is no progress. I disagree, as no agreement yet doesn’t necessarily mean no progress. Both parties have to create a record that allows them to say “we did our best” to their core supporters before ultimately compromising. What we’re seeing now is entirely consistent with creating such a record, and the timeline still allows for an agreement before the end of the year.

Not only that, the papers are actively throwing out discussion on various options. Besides the front-page NYT article I mentioned above, the WSJ has two articles on A4, “A Menu of Revenue-Raising Options” and “Charities Fight to Keep Deduction for Donors,” that review how both sides might agree and disagree. The discussion continues—and remember, anyone who agrees to anything too easily is going to be accused of leaving money on the table.

Consider a duck, gliding along the water. On the surface, it seems to be moving smoothly. Below the waterline, however, that same duck is kicking its little feet pretty darn hard. While we certainly can’t say that the negotiations are gliding along smoothly, we can be pretty sure that, below the surface, a lot of activity continues between staffs and within each party.

While Thursday's back-and-forth between Boehner and the White House isn’t good news, it’s not bad news yet, either. Both sides are still on a reasonable path between public posturing and private negotiation, and, although the clock is ticking, we’re not close to midnight.

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