Anxiety is on the rise in assuming that the fiscal cliff will bring
trouble for the economy if the $500 billion in scheduled tax hikes and
spending cuts is allowed to kick in come January. But guess what? The
pain has already started, courtesy of the forward-looking focus of the
capital markets.
The stock market in particular is adjusting accordingly amid the
self-inflicted pain that Washington seems intent on dispatching to the
country. The S&P 500 is down about 7% since mid-October and the
slide will probably roll on without progress on defusing the
fiscal-cliff threat.
"I see very little to be optimistic about right now until we get some
more clarity on these pressing issues," Randy Frederick, managing
director of active trading and derivatives at Charles Schwab & Co., tells the LA Times.
The crowd is inclined to agree, a view that's reverberating
throughout the markets. The benchmark 10-year Treasury yield has been
falling consistently for the past month, dipping to 1.58% yesterday—the
lowest since the end of August. The market's implied inflation forecast
is fading too. The yield spread on the nominal 10-year Treasury less its
inflation-indexed counterpart yesterday inched down to 2.38%, or the
lowest since September. The preference for safety isn't a good sign. The
fact that investors are willing--still--to chase Treasuries at such
painfully low rates says a lot about sentiment these days.
None of this is surprising. Risky assets taking it on the chin and a
new round of disinflation/deflationary winds are blowing. There's still
time to short-circuit this train wreck, but time is running short. The
truly sad part is that the economic data has been decent lately, and if
the fiscal cliff was a non issue it wouldn't be hard to imagine that the
prospects for growth would be fairly encouraging right about now. But
that's all on hold because of you know what.
The economy for the moment is at the mercy of politics in Washington.
Not surprisingly, the results are ugly. What skill set might get us out
of this mess? A flair for herding cats comes to mind.