The debt ceiling, of course, has precisely nothing to do with avoiding the fiscal cliff or tax reform. And President Obama, buttressed by his newly discovered spine, has essentially said as much. As he said Wednesday: “If Congress in any way suggests that they’re going to tie negotiations to debt-ceiling votes and take us to the brink of default once again as part of a budget negotiation—which, by the way, we had never done in our history until we did it last year—I will not play that game.” So in other words, the Senate spent the day arguing about a part of the fiscal cliff deal that the president says can’t be a part of the fiscal cliff deal. (#dada)

Meanwhile, in corporate America, preparations for the fiscal cliff continued. Chief executive officers have been thronging the Home Depot and Lowe’s, buying up the biggest shovels they can find. And they are putting the tools to work, shoveling cash out the door in the form of (lightly taxed until Jan. 1, 2013) dividends. Late Thursday, McGraw-Hill, the parent company of Standard & Poor’s, said it would pay out a special $2.50-per-share dividend (about $700 million) on Dec. 27. CEOs may be a little slow on the uptake, but they can clearly see that the current low rates on dividends are not going to survive the cliff.

In Washington, we are told, formal talks between the two parties that must make a deal—Obama and House Speaker John Boehner—resumed after a week of silence with a telephone call. Staff-level talks continued. Very little word leaked out. It could mean that they were doing nothing. But it could also mean that they are doing something. As Rick Klein of ABC News (@rickklein) tweeted: “Very litle news committed on #fiscalcliff today. which probably means the most productive day yet on negotiations.”

As the sun set on day 30 of the fiscal cliff hostage crisis, I went out into the front yard, scared off the deer, and tied a yellow ribbon around the old oak tree.

That’s right, Japan. Twenty years ago, Japan occupied the place that China now does in our commercial imagination—the aggressive, swashbuckling, mercantilist power from the east that was bent on global economic domination. But the past two decades haven’t been kind to Japan. Hampered by low growth, demographic decline, a constipated political system, a scarcity of energy resources, a massive debt overhang, and a crippling 2011 tsunami, Japan has become the sick man of Asia. The country still remains wealthy, and has a high savings rate. And its central bank and private investors always had a huge portfolio of U.S. government bonds. 

In September 2011, China held $1.27 trillion in Treasury securities, or 26 percent of the total owned by foreigners, while Japan held $984 billion, or about 20 percent. But something has happened in the past year. China’s export growth has slowed, and the country is trying to move toward a consumption-driven economy. At the same time, China’s central bank has let its currency decline in value against the dollar. Between September 2011 and September 2012, in fact, its U.S. debt holdings shrank to $1.155 trillion, down nearly 11 percent. (For a deeper historical dive, go here.) 

Meanwhile, Japan’s holdings have risen. Investors seek relative value. And while American bonds may not pay much interest, they pay more than bonds issued by Tokyo. One man’s low-yielding bond is another man’s high-yielding bond. But there are also mercantilist motives at work. “Japan has done some intervention to keep the yen from appreciating against the dollar,” said Ted Truman, senior fellow at the Peterson Institute for International Economics, in Washington, D.C. In addition, Japan may have bought U.S. bonds as a way of diversifying away from the troubled euro. And so between September 2011 and September 2012, Japan’s holdings of Treasury securities rose to $1.13 trillion, up $146 billion, or 15 percent.

President Obama went into what might be considered more hostile territory. He ventured out to the Business Roundtable, a group whose CEO members likely spent lots of time and effort trying to defeat the president earlier this fall. Obama told them that, in effect, there were no hard feelings. However, he was really intent on seeing that taxes on CEOs rise—and fast. “So what we’ve said instead is let’s allow higher rates to go up for the top 2 percent—that includes all of you, yes, but not in any way that’s going to affect your spending, your lifestyles, or the economy in any significant way.” Later in his remarks, he assured them that “We’re not insisting on rates out of spite, but rather we need to raise a certain amount of revenue.” (Pro tip: when someone says they’re not doing something out of spite, it’s probably a safe bet there are a few drops of spite involved.)

Obama went on to tell the dealmakers that if he could get Republican leaders to realize the reality that higher revenue could be paired with entitlement cuts, “then the numbers actually aren’t that far apart.” He continued: “Another way of putting this is we can probably solve this in about a week; it’s not that tough.” (Full disclosure: I’m short Republican leaders realizing reality.)

The Obama administration went out of its way to present a hardened position. White House spokesman Jay Carney noted that the Office of Management and Budget is preparing for the sequester that would take place in the event we went over a fiscal cliff. No serious talks were reported. Boehner held a press conference in the afternoon and pleaded for the president to submit a revised proposal. “We’re ready and eager to talk to the president and work with him,” Boehner said, in a less-than-convincing tone.

There was a brief fillip in the afternoon when it was reported that Obama and Boehner had spoken on the phone. My guess? It was a case of butt-dialing.

There are cars that run on electricity and gas, like the Chevy Volt, which sold 1,159 units. There are several new hybrids, and plug-in hybrids, on the market. Overall, Toyota sold 24,682 hybrids—there are four different Prius models plus Lexus hybrids–in the month, accounting for 15 percent of the sales, up from 28.7 percent from the year before. Ford’s new C-MAX hybrid, which debuted in October, and offers a plug-in hybrid option, sold 4,848 units.

And increasingly, cars that rely purely on the old-fashioned combustion engine are more efficient. General Motors offers “Eco” versions of models like the popular Cruze. Ford offers “Eco-boost”—a six-cylinder engine with more sophisticated electronic controls—as an option on many of its models, including pick-up trucks. “About 43 percent of the new Ford-150s sold use this engine,” notes Alan Baum, principal of Baum & Associates, a market-research firm specializing in the auto industry and fuel economy, in West Bloomfield, Mich.

Chrysler, which has been behind the curve in innovation, is playing the fuel economy game by rolling out smaller cars that get eye-popping mileage. In November 2012, Chrysler sold 4,489 Dodge Darts, which can get up to 41 miles per gallon; last November, the Dart didn’t exist. Chrysler’s sales of the gas-sipping Fiat 500 also shot up in the month to 3,603, more than double the November 2011 total of 1,618.

This is all good news for the economy, and for the environment. The U.S. car fleet, which has an average age of 11 years, is like a “rolling junkyard,” as Mazda executive Jim O’Sullivan recently put it. Each month, a certain number of clunkers simply conk out. That’s bad news for the owner. But it means that the typical car leaving the showroom simply gets better mileage than the typical car that is being traded in or junked. As people realize that gas prices may be here to stay, all kinds of manufacturers are marketing fuel efficiency across their portfolios. We may have progressed to a stage where turnover and new car sales make the U.S. car fleet more efficient.

The Twitter press conference was essentially partisan warfare by other means. Before it started, House Majority leader Eric Cantor played his usual role of being a non-constructive jerk: “Mr. President, time to get serious. Let’s protect small businesses and families from a harmful increase in tax rates and cut spending,” he tweeted from his handle, @GOPLeader. Note that Cantor’s tweet was not, in fact, a question. It was a statement. And it highlighted the general Republican modus operandi throughout these budget talks: don’t show any sign of actual engagement, just grandstand and repeat talking points.


For much of 2012, the institutional right believed it could overwhelm the president’s popularity and incumbency through the relentless application of third-party money. That didn’t work out too well for the Romney campaign. But they haven’t given up. The Heritage Foundation, the right-wing think tank, earlier in the day deployed some of its donors’ capital to buy up the designated #my2K hashtag so that it could use it to promote its own tweets. And so when people logged on, the top of their feed would contain tweets like this one, from @Heritage:

The Twitter conference started a few minutes late:

Yet as was the case in that game against Colgate, Carney’s success had a lot to do with timing. “Canada was free of crisis, but it wasn’t Carney that did it,” said Michael D. Bordo, professor of economics at Rutgers University. “It’s a much more deep-seated story having to do with the financial system’s design.”

Canada has a concentrated national banking system in which a handful of institutions, supervised by a strong regulator, dominate deposits, home lending, and stock trading. Banks weren’t permitted to have off-balance entities or dabble in subprime or shop around for compliant regulators, as they were in the U.S. Canada’s system also didn’t allow for the growth of unregulated shadow banks whose failure could torpedo the system, like AIG or Lehman Brothers.

In London, Carney will face a much more challenging task than he did in Ottawa. Analysts say the British financial system is still very much in crisis. The government’s austerity policies have sandbagged growth, and Europe’s financial woes aren’t helping matters.

Yet observers say that during the crisis, Carney had a much better understanding of the problems brewing in the markets than his academic counterparts 
did in the States. David Rosenberg, chief economist and strategist at the Toronto-based investment firm Gluskin Sheff, recalls a meeting with Carney in November 2007 in which Carney showed him data about the giant mortgage lender Freddie Mac. “It’s insolvent,” Carney told Rosenberg. “And if it is, Fannie Mae isn’t far behind.”

The Democrats are essentially pocketing the Republicans’ capitulation on revenue and asking for much more—they’ve adopted the old GOP strategy of simply repeating their desires as a method of bargaining. The first proposal, which Obama offered late last week, asked for lots of tax increases, plus some stimulus measures, and offered close to nothing on entitlements. Its chief plank was for marginal rates on high incomes to rise. And this time, the Democrats are confident that the Republicans’ cave on revenue is just the beginning. “I don’t think Republicans are willing to shut down the government over 2 percent of the country,” said top economic aide Jason Furman at an on-the-record briefing last week.

The psychological warfare can also be seen in the patronizing tone Democratic officials are now taking toward the Republicans. The Republican leaders, who used to throw terror into Democrats, are now objects of pity. There was Sen. Claire McCaskill, fresh after dispatching Tea Party loon Todd Akin, on Meet the Press. “I feel almost sorry for John Boehner,” McCaskill said. “There is incredible pressure on him from a base of his party that is unreasonable about this. And he’s gotta decide, is his speakership more important, or is the country more important.”

Treasury Secretary Tim Geithner took to the Sunday talk shows, too. For the last several years, Geithner has occupied perhaps the most unenviable position in Washington. He’s been like a quarterback operating behind an offensive lined composed solely of rookies. Time after time, he’s been blitzed—from the right and the left—on the bailouts, aid to the auto industry, and slow movement on mortgage aid. But on Sunday he was the one expressing empathy for poor John Boehner. “They’re in kind of a tough position now,” Geithner said on Fox News Sunday. “They’re trying to figure out how to find a way to support things that they know they’re gonna have to do. That’s going to be hard for them.” (Note: the very willingness of Geithner to appear on a Fox program is a sign of the administration’s newfound confidence.) Geithner pounded home the Obama administration’s talking point: we’ve put forward our plan. If the Republicans don’t like it, they should put forward their own.

In response, the Republicans countered with an offense that resembled that of the feckless Arizona Cardinals on Sunday. The passes were all over the map and failed to connect. Some key players were fatalistic. Sen. Lindsey Graham and Boehner both conceded that we may well go over the cliff. Others denied they had a role to play. Appearing on ABC’s This Week, Rep. Tom Cole said, “I don’t think we need to put a formal proposal out on the table.” Dan Senor, a Romney foreign policy adviser, proclaimed that Obama’s proposal, the one that caused Mitch McConnell to laugh out loud, and that “flabbergasted” Boehner, was too far to the left.

The fiscal cliff hostage crisis is soon to enter its fourth week. But really, the talks about ransoming the hostage haven’t even begun. Typically in a hostage situation, the party holding the hostage sets out its demands. President Obama has finally done that, with Treasury Secretary Geithner personally presenting the plans to Congressional Republicans on Thursday. There’s nothing surprising about the Republicans’ dismissive response.

There is something surprising, however, about the Republicans’ failure to offer an alternative. To be sure, there has been a well-documented, and sudden outbreak of real-keeping among Congressional Republicans, with dozens of legislators abandoning Grover Norquist’s no-tax pledge and acknowledging the need for more revenues. But the guys who want to liberate the tax cuts being held hostage have yet to propose an offer.

And the leadership still does not seem to grasp what is happening. This is not August 2011, or August 2012. The choice before McConnell and Boehner is not between the really unattractive proposal President Obama is offering and their preferred solution, which is the status quo on taxes plus huge cuts in discretionary spending and immediate action on entitlements. Rather, the choice is between what the President is offering—i.e. lots of tax increases paired with small spending cuts and very modest entitlement reform—and the 24-pack of whoopass that the fiscal cliff will deliver in about five weeks: much larger tax increases, plus much larger spending cuts, and no entitlement reform whatsoever.

Yes, President Obama wants to avoid the fiscal cliff. But he also wants to avoid being made to look like a chump, as repeatedly happened in his first term. And so rather than make a proposal and then respond to a stiff arm with a better offer, he is refusing to negotiate with himself. Instead of compromising on his initial offer—and hoping that meeting the Republicans half way with an initial offer will help bring them to the table—he went the other way. The president moved his goalpost further to the left. And rather than try to play an inside game and issue pleas for comity and compromise from the White House, he’s taking his popularity on the road.  

Watching and reacting to what Congress people say about the cliff negotiations and the prospects of a deal won’t give you an edge—regardless of what the headline writers say. Why? Well, the overwhelming majority of stuff that elected officials say to the public is bulls--t.  What they say has no bearing—frequently on the truth, or on whether a deal will get done. When someone says they’re optimistic about something about to happen, they could be genuinely optimistic—or they could be full of it.

Also, investors don’t seem to be very good at figuring out who really matters in these debates. The other day, CNBC’s Michele Caruso-Cabrera told a Democratic House member, Raul Grijalva, that his remarks against concessions on entitlements were making the stock market go down. Grijalva is a member of the minority in the House; most investors had likely never heard of him before his appearance.

More broadly, the market—and many of those who interpret the market’s mind on our behalf—have an extremely simplistic and wrongheaded view of what is good for it. The conventional investing wisdom assumes that a deal—any deal—to avert the fiscal cliff will be good for stocks and the economy at large. That may be true. It may also not be true. In fact, I suspect that at the end of the day the people who are agitating most ardently for a big deal are going to be very disappointed. Compared with a few weeks ago, we are much less likely to have major entitlement reform and more likely to have large tax increases on the rich, with marginal rates rising, taxes on capital gains and dividends rising, and the rich losing some of their cherished deductions. The investor class has been begging for a resolution. The resolution they’re likely to get could be a sharp slap in the face.

Will that be good for stocks in 2013 and beyond? Who knows? In fact, hiking taxes significantly on investors may not influence the markets at all. My colleagues in the politico-financial industrial complex vastly, vastly overvalue the relation of government policy and marginal tax rates to asset prices in the stock market—especially my colleagues on the right side of the aisle.

In the 80s, the Securities and Exchange Commission took the lead in prosecuting insider trading. A decade ago, it was Spitzer’s New York attorney general’s office that went after big Wall Street firms. Now the prosecutorial energy is coming from Preet Bharara, the ambitious U.S. attorney for the Southern District of New York.

The case developing against SAC is another sign of Bharara’s ambition. Last week, the government charged (PDF) Mathew Martoma, a junior executive at the huge hedge-fund complex, with trading on insider information gleaned from a doctor who helped oversee drug trials. Having secured the cooperation of the doctor, the government is aggressively pursuing Martoma. And on Wednesday, SAC told investors it has received a Wells notice—a formal notification from the Securities and Exchange Commission that it plans to pursue the company.

To a degree, Steven Cohen may be an irresistible target for prosecutors. It seems he either has remarkably bad judgment choosing employees, or he has set up an environment in which some people feel compelled or welcome to cheat. Even though he has yet to be directly implicated in any wrongdoing, the government has busted several people for insider trading who were either former SAC employees or SAC employees at the time of their alleged wrongdoing. For all intents and purposes, however, Cohen is SAC. He owns most of the capital SAC manages and makes all the key decisions. “He’s like the John Gotti of the hedge-fund world,” Spitzer notes, taking pains not to compare hedge funds with organized crime. In a prior generation, government prosecutors would put charts on the wall to identify the five organized-crime families and signal who they were after. “Today the target is hedge funds, and Steve Cohen is the capo di capo.”

But getting him won’t be so easy.  In the other insider trading cases the U.S. attorney’s office has successfully pursued, it was armed with wiretappings, tapes of conversations, and the cooperation of key players. That doesn’t seem to be the case here. The indictment of Martoma didn’t show any sign that the government had tapes of conversations between Martoma and Cohen. And Martoma has thus far said he is going to fight the charges.

The episode is noteworthy not just for its size, but for the alleged involvement of Cohen, who appears to be an indirect target of the indictment.

Hedge funds are a brutal business. Finish the year up, and you get a big bonus. Lose money for a year or two, and you’re out. Investors don’t hesitate to pull out their funds after a lean year, even if it has been preceded by several fat years. Every hedge-fund portfolio manager has to have an edge—some secret sauce, experience, or domain knowledge that helps him profit in highly volatile markets.

But in an industry with a high degree of mortality, SAC has thrived and evolved into an institution. It is one of the largest hedge funds in the world. Thanks to its superior performance, SAC charges higher management fees than most of its peers.

Many observers and industry participants believe that Cohen’s edge is simply trading skill. Several hedge-fund professionals tell me they believe Cohen is simply the most talented trader out there, one who can process information more intelligently and effectively with his peers. After all, the markets are highly unpredictable. Stocks can go down on goods news and rise on bad news. Cohen is an excellent sailor in choppy waters.

As a result, a lot of retail business that was not conducted on Thanksgiving Day 2011 was conducted on Thanksgiving Day 2012. It’s likely the same will be the case next year. This trend reduces the utility of Black Friday sales as an indicator. As ShopperTrak reported, while more Americans hit the malls on Black Friday 2012 than on Black Friday 2011 (foot traffic was up 3.5 percent), actual sales fell by 1.8 percent. Said ShopperTrak founder Bill Martin: “While foot traffic did increase on Friday, those Thursday deals attracted some of the spending that’s usually meant for Friday.”

What’s more, the mall may be the wrong place to be looking for shoppers. With every passing day, every passing week, and every passing month, a larger chunk of retail sales are conducted in front of computers, on mobile phones, or on tablet devices. People have never had a greater ability to shop from the comfort and privacy of their own homes. Plenty of people who were horrified at the prospects of stores being open on Thanksgiving pushed back from the table to make an order on Amazon.com or on Rue La La. As the National Retail Federation noted on Thanksgiving Day, NRF estimated “more than 35 million Americans visited retailers’ stores and websites Thursday—up from 29 million last year.” That’s an increase of 20.6 percent.

Simply put, online shopping is taking market share from physical retail sales—on Black Friday and every day of the year. Online shopping is not yet 20 years old, so overall it has a small chunk of retail sales. But increasingly, every day is Cyber Monday. According to the Census Bureau, in the first 10 months of 2012, sales at “nonstore retailers” were up 11.8 percent from the first 10 months of 2011, while overall sales were up just 5.5 percent. So far this year, nonstore retailers have accounted for about 8.6 percent of total retail sales. That means that overall holiday shopping sales can rise by a decent margin even as bricks-and-mortar sales barely budge. That’s what NRF said happened over the weekend. As The New York Times reported online, “sales increased 17.4 percent on Thanksgiving, and 20.7 percent the next day, according to I.B.M., which tracks e-commerce transactions from 500 retailers.” In its survey, the National Retail Federation found that “the average person spent $172.42 online over the weekend, or approximately 40.7 of their total weekend spending, up from 37.8 percent last year.”

Because the geography of shopping, and working in retail, is shifting, analysts who look only at Black Friday sales at stores aren’t seeing the whole picture. Rapidly changing consumer behavior makes it difficult to compare results from year to year. Instead, we have to look at online and physical sales on the period from Thanksgiving Day to Sunday to get a true view of how the holiday shopping season started.

Other members of the Thelma & Louise Caucus believe the cliff is desirable for reasons of justice, not of tactics. Jonathan Cohn, the longtime reporter and Ann Arbor–based health-care maven at The New Republic, is the president of the Michigan chapter of the caucus. For Cohn, the cliff solves all sorts of problems. He never liked the Bush tax cuts to begin with and says we need the money. “I always thought that we should get rid of all the Bush tax cuts,” he said. “It seems to me the Clinton-era tax rates were just fine.”

Jonathan Chait of New York magazine, who is a native of Michigan and formerly worked at The New Republic, represents the realpolitik wing of the caucus. Even before the election, he was gaming out the smart politics behind a cliff dive:

“On the morning of November 7, a reelected President Obama will do … nothing. For the next 53 days, nothing. And then, on January 1, 2013, we will all awake to a different, substantially more liberal country. The Bush tax cuts will have disappeared, restoring Clinton-era tax rates and flooding government coffers with revenue to fund its current operations for years to come. The military will be facing dire budget cuts that shake the military-industrial complex to its core.”

Going over the cliff, Chait argues, will finally allow Obama to turn the tables on the obstructionist Republicans who have made his life hell for the past four years. And he will be able to give up trying to compromise with House Speaker John Boehner because the nature of the game changes. Obama and his crew, Chait writes, “understand something important, something that has not quite sunk in with wary liberals, obstinate conservatives, or split-the-difference deficit scolds: They no longer have to.”

The preference for U.S.-made goods was particularly pronounced in product categories, such as hand tools. “For things people expect to be durable and pass on to your children, they are willing to spend the extra money if they can afford it,” said Sirkin. “And Chinese products just aren’t designed for the durability that we expect.” He also noted that anything that deals with children—toys, baby clothes, children’s furniture—found a similar response. Media reports on problems with Chinese-made drywall, or on lead paint in Chinese-made toys, have made parents think beyond price. Sirkin noted that 37 percent of U.S. consumers said they would be willing to pay 10 percent more for baby food if it were made in the U.S. 

Of course, it is easier to purchase patriotically when doing so is less costly. And Sirkin says that the shrinking cost difference between manufacturing in China and the U.S. is affecting consumer preferences. “Wages in China have been rising about 15 to 20 percent per year,” Sirkin noted. “And so the value equation has changed. Instead of having to pay double for a U.S.-made product is in many instances, the consumer is only going to have to pay 20 percent more.”

Sirkin and his colleagues were surprised by the changing attitudes of Chinese consumers, who are now much more keenly attuned to issues of quality in everything from dairy products to toys and furniture. “Chinese consumers are quietly recognizing the value of 'made in the U.S.A.,'” Sirkin said. In the survey, 50 percent of Chinese consumers said they had deliberately chosen American-made products over Chinese ones—even if it costs the same or more. This preference is largely due to rising concerns over quality and environmental issues among middle-class Chinese consumers.

Now, there’s some reason to be skeptical of these numbers. Surveys tend to measure sentiment and attitudes, rather than behavior. People do not always do what they say. And the playing field between U.S. and Chinese manufacturers isn’t quite level. But Sirkin says there is an important message embedded in this study. “People tend to discount U.S. manufacturing,” he said. “And they shouldn’t. The message for U.S. manufacturers and retailers is that they are undervaluing the Made in America brand by not making it prevalent.”

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.