‘Fiscal cliff’ warnings yet to faze Wall Street
By Neil Irwin,
In Washington, debate over the “fiscal cliff” is cloaked in apocalyptic warnings of soaring tax rates and a crashing economy. On Wall Street, the tone is different: All will be fine.
The stock market has been little changed in the past three weeks, with few wild swings. That comes despite the Jan. 1 deadline when tax hikes and spending cuts are to go into effect unless politicians reach a deal to avert them.
“Wall Street and Washington are different worlds and speak in different languages,” said Chris Krueger, a political analyst at Guggenheim Partners who acts as something of a translator between those two worlds.
Tuesday, for example, the Standard & Poor’s 500-stock index barely moved, down a mere 0.2 percent, even as President Obama insisted in an interview with Bloomberg Television that increases in tax rates for the affluent must be part of a deal. Meanwhile, House Speaker John A. Boehner (R-Ohio) warned that “if the president really wants to avoid sending the economy over the fiscal cliff, he has done nothing to demonstrate it.”
The markets’ sense of confidence — or, arguably, complacency — is rooted in two strains of thought.
One is that all the tough talk from the negotiators is mere posturing, nothing more than a signal to their allies that they are taking a stand in advance of real dealmaking closer to the deadline. Investors and executives have repeatedly seen brinkmanship out of Washington — including over raising the cap on government borrowing in the summer of 2011 — conclude with an agreement at the last possible moment.
And indeed, both sides in the negotiations have been sending private signals to business leaders that a solution will be found.
“I came out of this meeting optimistic, extraordinarily optimistic, that Washington broadly understands the importance of getting something done,” said Joe Echevarria, the chief executive of Deloitte, after a meeting between CEOs and President Obama last week.
But another argument for why there is no need for huge concern is that a short-term voyage off the cliff would do no lasting damage to the economy.
Even if there is no deal on Dec. 31, Treasury Secretary Timothy F. Geithner could order that income tax withholding tables not be adjusted to reflect higher tax rates on Jan. 1, which would mean that Americans would not immediately see smaller paychecks. The government could adjust the timing of payments to defense contractors and others to take the sting out of automatic budget cuts in the initial days of 2013.
Asked in a CNBC interview last week whether he thinks negotiators in Washington will reach a deal, legendary investor Warren Buffett said, “Yeah, I think they will. I’m not sure they’ll do it by December 31st” — showing no evident sense of panic over that possibility.
Analysts almost universally agree that if the austerity measures triggered by the fiscal cliff were in place indefinitely, there would be a recession in the first part of 2013. And the need to raise the debt ceiling in late February or March to avert a default on government debt will probably force a deal, even if the Obama administration and congressional Republicans reach no agreement by Jan. 1.
It is less certain what a brief time going off the cliff would mean to the economy. Some analysts argue it would be more painful than is widely realized. “One of the most dangerous ideas circulating in Washington is that it is okay to go over the cliff temporarily,” Bank of America-Merrill Lynch economist Ethan Harris wrote in a recent note. “Threatening or actually going over the cliff will likely do serious damage to economic and market confidence.”
The Wall Street and chief-executive crowds are attempting to be savvy in their reading of Washington. They know it takes a lot of huffing and puffing and posturing and jockeying just to get the point where any real negotiating can happen.
“It’s possible that this comes down to the last minute, but that last minute is around Christmas,” said Sean West, head of the Eurasia Group’s U.S. practice and another specialist in translating action in Washington to the financial world. “Markets price-in things in advance. We’re going to see enough turmoil before the eleventh hour if it looks like a deal is falling off track that stakeholders will scramble to pull together a patch.”
The basic question is, who is judging the political temperature better? Those at a healthy remove who know that these things usually work themselves out, if at the last possible minute? Or those who are closest to the action, who see little visible evidence that a deal is reachable by the end of the year?
They both could be right. As West suggests, it may be that what will finally force the parties to negotiate in earnest will be increasingly desperate calls from supporters in the business community, or a few hairy days on the financial markets of 5 or 7 or 9 percent declines.