“If Boehner can’t bring his plan B to a vote and win, he probably won’t be able to successfully sell any more comprehensive deal—and we go off the cliff.”

The quote above is from yesterday’s post. As you may have noticed, the world didn’t end last night, although it has changed significantly per that quote. Speaker Boehner could not bring his plan B to a vote—he pulled it once it was clear he didn’t have the votes—much less pass it, and now the complexion of the negotiations has changed again.

All of the preceding analysis is based on the assumption that the fiscal cliff is averted and that a deal, which phases in any tax increases and spending cuts over time, rather than imposing them all on January 1, is cut.

Seeing as the world will be ending tonight, that seems to be the only appropriate headline. I’ve stocked up on champagne this week; if I have to go, I want to go with a nice demi-sec—Veuve Clicquot, to be exact—and my family around me. There’s another couple of bottles in the refrigerator, just in case we have to wait a bit.

On the other hand, if I don’t have to go, I had better get going on the commentary. In this case, I think the markets are, in fact, a good predictor of the future, as they don’t seem to indicate a significant chance of the world ending. Although they were down a bit yesterday, I would expect a bit more of a sell-off, really, if the world were ending.

Fixed income

Over the past couple of weeks, I have been looking at the day-to-day evolution of the fiscal cliff negotiations and spending quite a bit of time talking about trees. When I did the 2013 outlook series, I did a lot of forest gazing, trying to figure out the bigger picture for the economy and the markets. Now is probably a good time to combine the two and look at the bigger picture of the fiscal cliff and what it means for the U.S. government and economy.

In a previous guest post, Peter Essele pointed out that, on an income basis, housing appears very affordable and that the aggregate price index has tracked quite closely with the sold/for sale ratio. The correlation between the two is quite high, at 0.93, suggesting that they are causally linked, which is certainly reasonable from a fundamental supply/demand standpoint. Peter went on to conclude that these metrics support the continued strong performance of the housing market, although, as more supply has come on the market, the ratio has become less favorable.

To try to estimate where the real economy will be in 2013, we must first consider where growth might come from. Consumer spending is approximately 70 percent of the economy, so this will be the first area we consider.

In the fiscal cliff debate, both sides have started to take off the gloves and trade offers. Boehner threw in the first bid, offering to accept higher rates on incomes over $1 million, and Obama said that he might be willing to move the bar above the $250,000 he’d been holding at. Obama’s most recent bid is for a $400,000 threshold. So we’re getting much closer.

On spending cuts, there’s been less progress. The President has ignored a Republican proposal to increase the Medicare eligibility age to 67. Not no progress, though, as Obama did accept a GOP proposal to use a different inflation formula for benefit calculation. This is important because it will result in big cost reductions (and benefit reductions) over time.

At the end of 2012, the U.S. economy finds itself, almost, at the beginning of a sustainable recovery. Consumer spending has recovered to levels above previous highs and is on par with recoveries from previous recessions. Retail sales are also doing well. The housing market has turned, with most markets reporting price increases year-on-year, and the number of houses for sale in most markets is below historical averages, suggesting that price appreciation will continue.

— Guest post from Peter Essele, senior investment research analyst

One area of the economy that has been making a strong comeback as of late is the housing market. During the depths of the recession, housing was among the most undervalued areas of the investable spectrum, as affordability reached multidecade highs. Countless valuation metrics, including price-to-rent and price-to-median income ratios, moved well beyond the averages witnessed over previous decades. The mindset of investors toward housing went from viewing it as an asset class that never depreciates to believing that it would never recover—all in a matter of years.