Oct 16

I Miss the Fiscal Cliff


Remember the good old days…of last year?

Remember, when the financial press warned about the US economy going over the ‘fiscal cliff’, because our so-called ‘leaders’ in D.C could not stop a fiscal contraction that would hurt a still limping economy?

Although the academically inclined chair of the Federal Reserve, Mr. Bernanke, mentioned the phrase, it really brings to mind a battle between two hard charging racers, heading for their potential demise…as brought to life in this video :

The result of this fiscal cliff wrangling was modifications to the income tax code plus another new word added to our collective vocabulary: ‘sequestration’. Eventually, then Treasury Secretary Geithner added the country’s debt limit into the stew of fiscal issues, and another ‘crisis’ was born.

As you read this, perhaps the D.C. Fumblers (that is a much better name for their hometown football team than Redskins) will have ‘solved’ the budget and debt limit issues that, once again, threaten the U.S. economy, financial markets, and, more importantly, the preeminence of the US dollar as a global reserve currency.

Perhaps not.

But, more likely than not, the Fumblers will trade a disastrous result today for the potential of a disastrous result to be named later (in just a few months). Another bad Fumblers trade.

The point is that we, as sentient humans, should not be fooled into using simplistic shorthand like fiscal cliff, sequestration or even the previous word d’jour,’ tapering.’ By falling back on this shorthand, we are conning ourselves into thinking that these problems are two sided or easily explainable. They are not.

Coke or Pepsi?

Left or Right?

Tapering Now or Later?

Fiscal Cliff or Not?

Sequestration or Not?

We must look behind the issues and apply reason to develop the vast array of choices that are open to us. And, most importantly, consider the intended as well as unintended consequences from those choices.

As for our portfolios, it is truly difficult to position them for all possible Fumbler scenarios as we approach what used to be called the fiscal cliff.

Some ‘experts’ tell us that markets have not fully discounted the probability of US default, or of the impact of a continuing government ‘shutdown’ on GDP. Others say that the markets already discount such probability efficiently (in concert with the ideas of Nobel Prize winner and efficient markets proponent Eugene Fama).

So, we are left to doing what is best based upon the unique requirements and risk appetites of our clients. In other words, no material change in operating procedure.

Meanwhile, one thing can be sure at this point in the political cycle. The D.C. Fumblers will continue to be true to their name.

The markets will now have to discount the possibility that watching the Fumblers deal with another ‘crisis’ will become a regular event, with increasing frequency….

Are you ready for some Fumbling?