In my mind, it’s a virtual tie as to which scenario is more likely – the end of the world as “predicted” by the Mayan calendar, or the U.S. economy falling off the “fiscal cliff” as “predicted” by just about every economic and capital markets commentator.
If the reader is unaware that the world will end on December 21, 2012 (according to many who claim that an ancient Mayan calendar suggests as much), then congratulations! Your life is obviously filled with meaningful and interesting activities. Predictions about the end of the world are just about as old as civilization itself. They tend to make headlines due mostly to their audacity, but so far, they have all proven to be wrong. As an aside, I find it somewhat ironic that anyone would trust the Mayans’ ability to predict anything far into the future – they certainly did not see their own end coming…
So what about the “fiscal cliff?” This is what the pundits are calling the expiration of many tax breaks and other “temporary” factors coupled with another congressional tussle over the debt ceiling. A report from the Congressional Budget Office this month warns that without any action from Congress, the expiration of the Bush-era tax cuts, the ending of the payroll tax cut, other automatic spending cuts, and changes in tax treatment for dividends and capital gains could severely impact U.S. economic growth. Some are suggesting that all of these items may shave off 3-4 percentage points from GDP, and given that current economic growth is around 2%, this would “plunge” (to use a favored word of the pundits) the U.S. economy into recession.
The sincerity and gravitas with which the commentators report on the “fiscal cliff” are quite amazing. We all know that the media (and maybe all of us) loves to see a train wreck. At the human level, we are repulsed by the tragedy of such events (“Oh, the humanity…”), and at the same time, something deep in the feral part of our brains makes us want to gaze at the scene of destruction. As Don Henley so tellingly said, “It’s interesting when people die (“Dirty Laundry” – 1982).”
This “fiscal cliff” is not only a train wreck, but one where we know the timing, the location, the magnitude and nearly every gory detail (body count?) long before it happens. This, in my view, is why it’s getting so much press.
The “fiscal cliff” notion is a classic example of a ceteris paribus (all else held constant) analysis. All of the commentary on this starts with the word “if.” “If Congress fails to act…” “If the President and the Legislators cannot find a compromise…” And so forth. In my view, these are pretty big “ifs.”
I am not a political expert, but I find it hard to imagine that the U.S. President (whoever he/she may be) or the Congress would want to be responsible for creating a recession simply by fiat. The more likely outcome, in my opinion, is some sort of compromise that prevents recession, kicks the bigger sticking points down the road and ultimately pleases no one. Welcome to American politics, my friends!
In all seriousness, if the “fiscal cliff” were a genuine and likely threat to the capital markets, Mr. Market would be saying something about it right now. So far, I see little evidence that the markets are concerned about this possibility at all. They are a bit concerned about how Greece will leave the EU – kicking and screaming or head held high. Either way, the June election there will likely give us all the information we need.
If the markets respond badly to the result, I would view it as a buying opportunity. On the other hand, the markets may be already discounting this probability. That’s the tricky thing about predicting the future – it’s so uncertain =)
It’s much easier in my view to buy cheap stocks…