Weighing The Week Ahead: Is Cliff Diving In Our Future?

Like nature, the media abhor a vacuum. There is so much time, and so little valuable content!

That is the best explanation I can offer for the latest media frenzy: The Fiscal Cliff.

It was the big theme on financial television, but also caught the attention of the mainstream news shows as well. This week's Barron's has the recessionary implications of "the cliff" on the cover. CNBC has continued its images of crashing vehicles and also introduced promotional messages and little buttons that all of their anchors wear.

Anyone paying attention has been following this issue for months, understanding that the tense election climate prevented any real progress. The day after the election the stories started, mostly reflecting unrealistic expectations about how quickly Congress goes back to work!

There was also an instant verdict by some, suggesting that since the partisan alignment is about the same, there is no chance for progress.

This chart (new investor resource page -- a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love feedback. We have a good discussion going on bonds versus funds, and I plan a separate article that will provide a further forum.)

Final Thoughts on Cliff Diving

I can state this pretty simply: A dive over the fiscal cliff will not happen. There are specific and personal tax and budget consequences for nearly everyone -- especially major GOP constituencies like those who will get hit with the Alternative Minimum Tax and business leaders who need to plan. Most people seem not to realize how close the two parties are to a reasonable compromise. I first expect a temporary plan that will address some problems and buy time, but I would not be surprised to see specifics sooner than most expect.

The simplistic comparisons to 2011 have many flaws, and the comparisons to TARP in 2008 are even worse. I have been planning to write more about the probable outcome of the tax and budget negotiations. This is best done when the topic is relevant and we have a little more useful information.

Meanwhile, what we have right now is a little bit of preliminary posturing. Imagine that you were about to represent your team of investors (or workers or business leaders) in important negotiations. Would you start the process with a public declaration of your best and final offer?

There is no information in this posturing, but you can expect to hear all sorts of wild statements. These provide a negotiating position and set the stage for compromise. Meanwhile, the stock market rallies on one sentence from the President or the Speaker, and then sells off on the next. Most of the predictions you see come from those who no experience or track record in forecasting public policy outcomes. They also seem to have forgotten that the election is over, providing a window of opportunity for joint action before the battle resumes.

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Written By: Jeff Miller