112th Congress Averts Fiscal Cliff But Leaves A Mess For The 113th

by: Evan Schnidman

I have spent the last few days examining the fiscal cliff deal and pondering just how I should feel about Congress averting a disaster they caused. The only conclusion I can come to is that the 112th Congress declaring victory from the fiscal cliff brings to mind a favorite line from an Adam Sandler movie. At one point in "Big Daddy" the child Sandler has been caring for proudly proclaims "I wipe my own @**;" Congress declaring victory by averting a cliff they designed is much like members running through the halls proud that they are capable of wiping their own butt. Unfortunately, they didn't do a very good job because the 113th Congress is going to have to clean up their mess in the next two months, and they have plenty of other work to be doing.

Unresolved Issues

I could go on to examine what exactly the fiscal cliff deal does, but most readers have already examined these details. So, moving beyond the successful near-term clarification of taxes, it is more important to examine fiscal uncertainty on the spending side.

Spending details fall under three categories, the sequester, the debt ceiling, and government shut down. As has been widely publicized, the sequester has been postponed until March 1 and absent significant cost-cutting compromise, these massive cuts will take place. Around that same time, the Treasury will be out of tricks to cover our debt costs from the debt ceiling that was breached in late December. Make no mistake about it, this is not about the U.S. government's ability to borrow money, it is about the government's ability to pay back money that has already been borrowed. Absent raising the debt ceiling the U.S. government will default on its debt with disastrous ramifications. Finally, the government is currently operating under a continuing resolution that expires in late March, should Congress fail to reach a deal, the government will shut down in early April.

As you can tell, the 113th Congress has their hands full cleaning up the fiscal mess left by the 112th Congress. Making matters worse, while just about everyone acknowledges the need to cut around $4 Trillion from the U.S. budget deficit over the next decade, the new tax policies will only account for around $650 billion. So, Congress and the President still need to work on much more significant debt reduction. In addition to the fiscal issues at hand, the Obama administration also clearly wants to overhaul the Farm Bill, Gun Control, and Immigration. All the while, they will be fighting to install new cabinet level personnel and some have speculated that Obama will also make a play for a grander foreign policy vision.

Investor Outlook

Given the tendency of policymakers to continue kicking the can down the road, investors should not expect a definitive, long-term policy in the near future and this series of unresolved policy steps means continued market uncertainty over the next couple months. However, investors should be mindful that in each manufactured crisis the market seems to follow a set pattern: a rise from euphoria over a deal followed by weeks of tentative gains due to general uncertainty. This gives way to a market drop from terror that the no deal will be reached and finally euphoria once again. Since Congress seems to only be able to act at the very last moment, this pattern should be expected to persist over the next few months as each fiscal matter is dealt with in turn.

The Obama administration has made a point of identifying the debt ceiling as their top priority, so it is likely that will be the next issue resolved. However, Congressional Republicans are unlikely to cede that leverage without concessions regarding spending, so investors should expect another medium-term deal in late February. This 11th hour deal will likely be followed by more uncertainty leading to a possible government shutdown and another deal in early April. Assuming the market continues to follow the same pattern it has followed in previous manufactured crises; investors should be able to capitalize on the pattern our policymakers have created.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.