Day 13: Wall St. Happy With Fiscal Cliff Negotiations, But Skeptics See Photo-Op
On Day 13 of the Fiscal Cliff Hostage Situation, the prevailing mood about a deal to head off tax increases and spending cuts was optimism—even complacency … at least in New York.
Last Friday, President Obama held meetings with congressional leaders. When the protagonists emerged and declared them to have been productive, the stock market began to rally. The optimism continued.
Monday morning. As the CNBC.com headline put it, “Dow Soars 150 on Cliff Hopes.”
In fact, there seems to be a growing consensus among those who follow markets with the same ardor as they do on MSNBC that something is happening. A deal will get done, simply because it has to be done. Time is running out, and if no grand bargain is reached, bad things will happen. Wall Street, whose denizens have the most to lose from a vault over the fiscal cliff, craves a resolution. Which is one of the reasons CNBC is running its “Rise Above” campaign, which calls for Washington to eschew partisanship and make a deal to avoid the cliff.
On Sunday night, Goldman Sachs—the firm believed by many to control Washington, D.C.—sent out an optimistic note, suggesting that the hostage would be released in a few weeks: “We believe the ‘fiscal cliff’ ultimately will be avoided, but precedent suggests any resolution will not happen until mid- to late-December.”
Monday morning, Ben White, Politico’s sharp New York–based watcher of the calamitous intersection of Wall Street and Pennsylvania Avenue, declared it all over except from the shouting. “There seems little chance the cliff battle will go near or past the Dec. 31 deadline,” White wrote. “Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans” and are figuring out how to cut their losses. “So while talks will continue and the public kabuki will play out for a few more weeks, we are really just waiting on a final score.”
That’s possible. But let’s take a step back. Just because the White House and congressional Republicans told us their meetings Friday were fruitful, it doesn’t mean they were. Hell, Neville Chamberlain thought his September 1938 meeting in Munich with the Germans was fruitful. To admit that a meeting was not fruitful is to admit that you wasted your own time, and, worse, the time of the media that staked out the meeting to get the anodyne post-meeting quote.
Besides, the stock market is an extraordinarily bad pundit. People on Wall Street have a very superficial understanding of how Washington works. The “markets” are quite poor at predicting gigantic and obvious trends, like the credit bust of 2008 and the Lehman Brothers failure, let alone near-term legislative events. The markets did not predict the failure of the first TARP bill in the fall of 2008. Nor did they predict the failure of the debt-ceiling negotiations in the summer of 2011. In fact, they were caught completely unaware.
“I wouldn’t pay much attention to Wall Street’s assessment of politics,” said Barry Ritholtz, a money manager and proprietor of the Big Picture blog. “Let me remind you that the Street bet heavily on Romney, in both donations to campaigns and how they positioned their portfolios. They misread what turned out to be an Electoral College blowout of 332 to 206, and the sell-off since the election is as much about the mispositioned Street reversing themselves as anything else.”
Analysts can describe the contours of a deal, which are obvious. A cliff-averting deal would consist of an agreement to raise revenue by doing one or more of the following: closing loopholes, eliminating deductions for high earners, changing rates on income, capital gains, and dividends. And it is true that there are rising signs of capitulation from the right. Glenn Hubbard, the dean of Columbia’s business school, who was Romney’s chief economic adviser and stood to be the Federal Reserve nominee, went on Morning Joe Monday to wave a white flag of sorts. “We’re going to have to have some compromise. And I think step one is figure out how to raise some revenue without killing the economy.”
But the GOP is still a party of anti-tax absolutists. Despite their defeat at the polls, the party’s top elected officials and economic thinkers—including Hubbard—haven’t really budged from the notion that higher revenues should only come from eliminating deductions, and that tax rates should stay exactly where they are. Meanwhile, Rep. Paul Ryan, now rested and removed from the vice presidential campaign, is back in the House and set to play a leading role in the talks, The New York Times reported on Monday. This does not bode well, since Ryan, the Randian situational deficit hawk, opposed the Bowles-Simpson Commission’s deficit-reduction plan, even though he was a member. Despite having spent his entire adult life in Washington, Ryan has yet to show an ability to make bipartisan legislative deals on taxes and spending. Meanwhile, House Speaker John Boehner presides over a fractious majority that includes several lame ducks, and President Obama is demonstrating uncharacteristic spine.
As a result, I find this bit of financial-political punditry more compelling than the optimistic talking points we’ve seen: “We interpreted last Friday’s press conference on progress in the fiscal cliff negotiations as little more than a photo-op, and we expect that these negotiations will drag on into the beginning of next year,” said Chris Bury, co-head of U.S. rates at Jefferies, the New York investment bank.
Meanwhile, the most important reactions to the hostage situation aren’t evident in the broad stock market indices. Rather, we should look at what individual companies are doing as they start to reckon with the facts that the hostages may not be released by Jan. 1. Wynn Resorts this week will pay out a special, $7.50-per share dividend, the better to take advantage of today’s lower tax rates on dividends, which are now in jeopardy. Walmart on Monday moved its dividend that it was supposed to pay on Jan. 2 up to Dec. 27, the better to avoid higher taxes.
The Dow Jones Industrial Average may be showing confidence in a deal. But the retailer that is one of the index’s constituents isn’t so sure.