The Independent Market Observer

12/11/12 – Y2.013K?

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Dec 11, 2012 12:01:48 PM

and tagged Fiscal Cliff, Market Updates

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I have spent quite a bit of time reading, thinking, and writing about the fiscal cliff, going into its potential risks and damage in some depth. While it’s certainly appropriate to analyze the situation, something occurred to me the other day: Could this be another Y2K?

You may remember it—the disaster that didn’t happen. Despite the predictions of nuclear power stations melting down and airliners dropping from the sky, the millennial New Year celebrations went just fine, and the world was still there the next day.

The reason everything went so smoothly, of course, wasn’t that there was no problem—there was—but because the panic had led everyone to think through the consequences and solve the problems before they hit the fan. The panic led to the solution, in a way that probably couldn’t have been replicated with less hype.

I’m sure you see where I’m going with this. As much as most of us hate the panic surrounding the fiscal cliff, there’s no denying that it has concentrated minds in Washington, D.C. Slow progress seems to be continuing, per “Obama-GOP Cliff Talks Take Positive Turn” on page A4 in the Wall Street Journal. Other articles discuss how, this time, Boehner has his troops more in line (see “Boehner’s Test: Keep GOP Ranks Behind Him,” on the front page of today’s WSJ). After the debt-ceiling debacle last year, and given the election results, the focus is clearly on getting a deal done. The fact that failure will mean bigger tax hikes and military spending cuts only adds to the incentive from a Republican point of view.

I suspect that the talks underway are indeed serious and could result in a bigger deal than anyone expects. The main reason I think this is that the meeting has been cut down to the principals, and no one is talking to the press. Despite the ongoing coverage, the politicians are doing their job. With expectations so low, and the possibility of failure discussed more and more, the chances are rising for a positive surprise. “No Time for Cliff Worries: Some Chiefs Keep Spending” on B1 in the WSJ notes that many companies are looking past the cliff and making plans for success regardless. To the extent that this reflects a general attitude, it sets the stage for a minimized downside if we do go off the cliff and a positive upside surprise if we don’t.

We’re a long way from a done deal, and even further from seeing it actually passed. The Republican House remains the biggest obstacle to proposals involving tax increases, which any deal certainly would. On the other hand, depending on the spending cuts involved, the Democrats might be the problem. We just don’t know. I do know that, as things continue to get worse, it’s worth remembering Y2K and the fact that the panic actually led to a solution.

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