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My Sunday Washington Post Business Section column is out. This morning, we look at How important is the fiscal cliff for investors? Hint: Not very. I wanted to call it “Why all the Angst about the Fiscal Cliff is a Bullshit Media Creation” but the Washington Post has some sort of standards which disallows that language.

The column was motivated by a few factors:

1) The manufactured nature of this faux crisis; The Columbia Journalism Review blamed the entire construct on a CNBC push.

2) The Google Trend chart we showed a few weeks ago, revealing how this popped up immediately after the election. This is purely political theater performed by the election’s losers. Had Mitt Romney won the election, we never would have heard any of this.

3) The utterly disingenuous nature of the CEOs pushing for this — somehow, these same CEOs have managed to massively underfund their own company’s pensions, a far bigger potential crisis for both the economy and investors.

Suffice it to say that I think this entire issue is a purely fabricated display of childish foolishness, a national embarrassment.

Here’s an excerpt from the column:

“Whenever the media obsess over a potential crisis, history teaches us that it is most likely to be overwrought hype. Recall the Y2k frenzy as Exhibit 1 in The People v. Really Bad Media prosecution.

What does the fiscal cliff mean to investors?

Let’s start with a definition: The term refers to the deal that Congress made in late 2011 to temporarily resolve the debt ceiling debate. The “sequestration,” as it is known, calls for three elements: tax increases, spending cuts and an increase to the payroll tax (FICA). The Washington Post’s Wonkblog has run the numbers and finds “$180 billion from income tax hikes, $120 billion in revenue from the payroll tax, $110 billion from the sequester’s automatic spending cuts and $160 billion from expiring tax breaks and other programs.”

That is a not-insignificant amount of money, but it is hardly the end of the world. To put this into context, it is a little less than the TARP bailout for Wall Street in 2009 and somewhat less than the American Recovery and Reinvestment Act, President Obama’s stimulus package. An educated guess puts this at about $600 billion to $700 billion out of a $15 trillion U.S. economy. I’d ballpark that at about 4 percent of the GDP, or 0.50 percent of the forecasted GDP growth of 2 percent for calendar year 2013.”>

The rest of the piece looks at what is driving markets and investors.

 

Note: If any one can send me a PDF of the print edition (not the regular online version is would be appreciated.

>

Source:
How important is the fiscal cliff for investors? Hint: Not very
Barry Ritholtz
Washington Post, December 2 2012
http://www.washingtonpost.com/business/how-important-is-the-fiscal-cliff-for-investors-hint-not-very/2012/11/29/f10e982c-38ce-11e2-b01f-5f55b193f58f_story.html

(PDF ?)

Category: Investing, Politics, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Fiscal Cliff: Much Ado About Little”

  1. ByteMe says:

    I’m referring to it as “the fiscal curb on a cracked sidewalk”. It may cause us short-term problems to cross the street, but the stores are better on the other side anyway.

  2. CrispE says:

    I’m not so sure the effect will not be stronger. Here’s why: What do Americans do when they see much less money ($30-$80 per week) in their paycheck? Do they say, “that’s a small amount compared to my income” or do they say, “The SKY is FALLING”? When they say the later, what does the “sort of efficient market do”? Does it say, “this too will pass” or “The SKY is FALLING”?

    My money is on the latter…

  3. I did a back of the envelope check on how correlated these fiscal cliff talks are to the stock market — only mildly correlated, if not moderately. Yet we’ve only heard about and seen news on the fiscal cliff since the election. While the stock market isn’t entirely responsible for what’s happening in our wallets, stock indices are meant to be a “thermometer” of overall US economic health. So, yawn, I think it’s time to move on and pressure Washington to multitask.

    Here’s where I did the analysis on my blog: http://www.thewallstreetgeek.com/2012/11/how-the-markets-need-thelma-and-louise/

  4. JimRino says:

    With this kind of informed subversive article, I wonder how long the Illuminati will let you publish. :^)

    Thanks.

  5. 4whatitsworth says:

    Agree, this a crazy miss placed communication. This weekend I was thinking of what would be the right way to package this for the American public. Here is what I think would be the right approach lets call it “Trust for America”. Let all the tax rates expire and maybe even cap deductions. All of these revenues should go into a TARP like fund/holding account call it “TFA”.

    Next put some rules in place where the administration side of government must operate at some % of GDP you could have a few buckets with a % of GDP assigned like defense, transportation, pensions, welfare, general admin. This would force the government into a sustainable model and also tie them to GDP. It also puts in place the sound practice of separating investments vs expenses.

    Finally put the trust for america funds to great use fix our roads, fix our education system maybe give everyone free internet, cable TV and phone (Think of that benefit to the middle class (families pay 300-500/month for this crap). You can also build some nuclear power plants new hospitals and all sorts of things that we need. This would create a tremendous amount of economic activity.

    Each administration can then be evaluated on how well they managed Americas trust.

    Of course this can never happen since this would control rather than account for the political machine.

    Did I really hear that Obama wanted to have no debt ceiling? Unlimited government really?

  6. JimRino says:

    I alway wonder how the dying party can take the position that the deficit is a terrifying disaster around the corner, and Not DEMAND the Bush Tax Cuts Expire?

    It can’t be a disaster if you won’t fix the problem by restoring the Clinton tax rates.

  7. carleric says:

    Its a tempest in a teapot….well said BR

  8. slowkarma says:

    I think you’re wrong on two counts.

    1) You seem to be making an argument (implicitly, not explicitly) that what the media says doesn’t matter, especially if it’s wrong. In other words, if the media is wrong about something, then nothing will happen. I would suggest that the media is strong enough that it could create at least a short-term panic in which a lot of naive investors, already damaged by the events of the past few years, could get hurt again. This is readily apparent in the way the market jumps around on insignificant news hyped by the media (who really knows what it means when a junior minister complains that the Greek problem hasn’t been fixed?) If the clock that’s running on one of those financial networks (MarketWatch? Bloomberg? One of them) ticks down to zero, I think there could be a significant move in the market. In other words, it may be bullshit, but what happens if we go over the (phony) cliff won’t be bullshit.

    2) The effects of TARP were significant, both economically and psychologically. We’re set up for the same thing here — some direct financial and economic impact, and significant psychological impact. And another recession, even a brief, shallow one, coming so soon after the Great Recession (and who even knows if that’s over) will not be good for the general investment climate. It could be 1937 again…especially if a “cliff” decline is then followed by the earnings recession of 2014 that you mention in your last graph.

    Whatever the direct economic impact of the cliff and its various elements, the investing population is already being trained to believe that politicians are feckless idiots who are running the economy like a carnival bumper-car ride, where you never know when or how hard you’re going to be hit. That is not good for the investment climate.

    ~~~

    BR: 1) Thats a different argument — but I suggest you recall that the economy collapsed even before the media knew the derivatives/sub-prime/securitization story. So whats on tv and in the papers is not going to thwart the economy.

    2) The TARP discussion counter argument is that post TARP, we had 6 more months of panic, selloffs and economic dislocations. So I don’t buy that the media coverage or not mattered as much as wildly oversold markets, FASB157, ZIRP, QE, etc. in March 2009 was what helped things begin to stabilize.

    3) You may not know, but I do — Great Recession ended in June 2009

  9. postman says:

    “An educated guess puts this at about $600 billion to $700 billion out of a $15 trillion U.S. economy. I’d ballpark that at about 4 percent of the GDP, or 0.50 percent of the forecasted GDP growth of 2 percent for calendar year 2013.”

    If GDP growth is 2% or $300 billion, then isn’t the fiscal cliff effect of $600-$700 billion or 4% of the GDP twice forecasted GDP growth, not .50% or 1/200 or even half (if the decimal point in .50 is misplaced)?

    Or am I missing something?

  10. Your math is correct — if only we calculated GDP that simply ! Its not quite 2% growth of $15T is +$300B (That would make life too easy)

    GDP = private consumption + gross investment + government spending + (exports − imports)

    Rising taxes don’t get simply subtracted (the money is still collected and spent) And falling government spending similarly doesn’t just go away — there is that much less debt when that happens.

    See this for the methodolgy of how GDP is computed: “Measuring the Economy: A Primer on GDP and the National Income and Product Accounts”
    http://www.bea.gov/national/pdf/nipa_primer.pdf

  11. JimRino says:

    Seems the threat of a global recession has subsided as well:

    Chinese Oil Demand Continues Robust Growth:

    http://blogs.platts.com/2012/11/24/china_oil_dem/

  12. streeteye says:

    economy and level of markets aside, could have tax impact investors may wish to consider, eg if it’s a good year for that Roth conversion

    http://www.pbig.ml.com/pwa/pages/Taxes-Elections-and-the-Fiscal-Cliff.aspx

  13. Stan Klein says:

    You imply that Y2K was a bunch of of “overwrought hype.” It wasn’t. It was real. Because of the hype, most organizations got themselves prepared and did the necessary fixes. For example, some electric power control centers did a workaround of resetting their internal clocks to a year in the 1970′s that had the same configuration of days and dates as 2000. That enabled them to get through the date rollover unscathed. A lot of the field equipment at the time was still electromechanical and not as subject to Y2K effects as more modern microprocessor-based equipment. Those kinds of things helped the lights stay on. Other industries attended to the issue, did their fixes, and got through the rollover without problems. It was only a nothing event because of a huge effort to prepare.

    However, a few organizations didn’t prepare properly. There was a small insurance company in Maryland whose accounting system crashed because of Y2K and prevented receiving premiums and paying bills. The Maryland Insurance Commissioner had to shut down the company and transfer its business to another company whose system worked. The Norwegian railway system had a serious problem on New Years Day 2001 that turned out to be a Y2K problem. Other countries reportedly had major problems at the Y2K rollover that they tried to keep quiet.

    It may have been hype, but it wasn’t “overwrought.” It got people paying attention and doing what they needed to do. That is the only reason it seemed like not much.

  14. eliz says:

    BR: 3) You may not know, but I do — Great Recession ended in June 2009

    There are some very intelligent people who suggest “another” Recession is already in play or just in front of us ~ e.g. John Hussman, Lakshman Achuthan, Mike Shedlock, Tim Wood.

    With such a weak official end to the Great Recession, “the small people” (including myself in this lot) are not feelin’ it much. Consider the June record of 46.7 million people on food stamps. In retrospect, will these back to back contractions be viewed separately, or as segments of something larger (e.g. for the market, the phases of a Dow bear; for the U.S. populace, one long slog through America-Japan-style)?

    ~~~

    BR: That’s a different statement than the Great Recession never ended.

  15. droubal says:

    If America can’t tolerate a short cliff, what is going to happen when the music really stops and we find ourselves as another Greece?
    The cliff is a few percent of GDP. How much is Greece GDP down, 20 or 30%?

    It’s time to stop putting off the inevitable, best to start dealing with it now.

  16. James Cameron says:

    > I would suggest that the media is strong enough that it could create at least a short-term panic in which a lot of naive investors, already damaged by the events of the past few years, could get hurt again

    I would suggest that the longer this drags out – and it looks very possible that this could beyond Jan 1 as both sides assess the political consequences of their positions – the bigger impact on the markets. I would also suggest that once people start seeing the impact to their paychecks or realize the AMT is hitting THEM they will not just be reading about the “fiscal cliff” or however one wants to characterize it but actually experiencing it . . . and that will kick the discussion into an entirely different realm.

    If there’s a silver lining to this debate it’s that for investors it may create short-term buying opportunities – I suppose we will have to wait and see, but I’m fairly confident there will be a significant market reaction the longer the impasse endures . . . I am also equally certain an agreement that maintains current (effective) tax rates for the great majority of people and reverses sequestration will also eventually be reached, the only question being when . . .

  17. CB says:

    The fiscal cliff seems like obvious political theater and media crisis-mongering to keep people distracted from the bigger corpolitical swindles. Many investors have figured this out by now but the lack of real public outrage is sad.  
    We should throw every member of the supercommittee? (more like stupidcommittee) out on his ass. In most every other realm of human activity people who are specifically tasked to make timely critical decisions and compromises are quickly dumped and discredited if they fail to do so. That was the job – they blew it – out they go – no excuses. Throw the bums out please – since they devised the whole cliff idea can we at least get the minor satisfaction of booting them all right over it?
      

  18. ToNYC says:

    The Joe Kernan CNBC political-ed machine needs to Rise Above its millionaire paycheck ego since it Fell Below any journalistic standard of objectivity. Buffalo Bob did a better job of selling Wonder Bread for a whole lot less.

  19. A says:

    As panic sets in, the only real positive from all the hype, is to finally buy good quality companies on sale.

  20. VennData says:

    You’re a small businessperson. You make $300,000 a year after paying all of your businesses expenses. You’re telling me even though you get the tax cut on the first $250K, the tax hike on the next $50K is going to ruin you?

    That is complete bullshit. How will that stop you from hiring someone. If you hire someone, you get to deduct their pay, thereby LOWERING your taxes.

    If you make $500,000? You have financial problems? Come on.

    Anyone who falls for this is an idiot.

  21. MikeG says:

    this popped up immediately after the election. This is purely political theater performed by the election’s losers.

    But…but..how can this be?
    America has a “librul media”, so why are they heavily promoting a Republican- manufactured bullshit “crisis”?
    Maybe fair and balanced Fox can tell me.

  22. JimRino says:

    It makes me wonder if America Ever had a “liberal” media.

  23. Beleck says:

    this Fiscal cliff is all hype, as the number cited show. another thing, we could never be Greece, so the comparison is just more BS to scare people into not thinking.

    and that is how the Politiciasn/Corporations and so called Liberal Media aka Fox news/CNBC et al control the conversation.

    it is so sad to see such lies and propaganda never challenged.

  24. gman says:

    The mushroom cloud of Iraqs WMDs can be seen just over the edge of the fiscal cliff.

    One more story about about going over the cliff “causing rates to rise” will cause me to boycott that outlet!

    Cut supply of 10yr and increase demand by slowing growth…is going to lower the price?

  25. capitalistic says:

    What’s more irritating is when CEO’s of large companies complain that the fiscal cliff is stopping them from investing, or it’s hurting their earnings. It makes one realize that there are more fools than you previously thought.

  26. DuchessGateau says:

    vid of Sen Bernie Sanders reacting to GS CEO Lloyd Blankfein’s call for austerity:
    http://www.sanders.senate.gov/newsroom/media/view/?id=55a0f9e5-5c9e-42ad-b451-dc037215e022

    “Think about the arrogance of these guys on Wall Street who were bailed out by the middle class of this country when their greed and recklessness nearly destroyed the financial system and now they come to Capitol Hill to lecture Congress and the American people about the need to cut programs for working families,” Sen. Bernie Sanders said in a Senate floor speech.

    Nothing is required to “add up” for the big banks. As the Sanders-sponsored audit of the Fed revealed, trillions were printed to mask black holes of bank debt. But taxpayers are required to bear tax increases AND entitlement cuts. Because numbers must ‘balance,’ unless you’re a bank.

    WAPO: “…In addition to $1.6 trillion in new tax revenue, (Geithner’s) proposal called for $600 billion in spending cuts, a majority of it from Medicare and Medicaid, as well as A NEW POLICY TO ALLOW THE PRESIDENT TO RAISE THE STATUTORY LIMIT ON FEDERAL BORROWING WITHOUT a majority of CONGRESS APPROVING.”

    And a crisis is the perfect opportunity to usurp the authority of Congress over spending! Not that Congress seems to mind…

  27. AtlasRocked says:

    And through historically known and exploited flaws in the democratic voting system, key bulwarks separating always-misused powers of benevolence from the gov’t actors responsible for borrowing and money printing were removed from the Constitution, then the most ignorant economic actors: the less educated, the highly educated technocrats who could knew they could profit, and their lying leaders, began running the economy much more from the central government, relying more and more on borrowing and printing, instead of sound regulations, to fix issues.

    Worse than this, they began blaming the people who had less and less influence on policy, so that they could never take ownership of their easily seen failures. They owned critical decisions but made sure blame was never on them, that was for their political enemies.

  28. [...] sound mind on the subject, Barry Ritholtz at The Big Picture: Suffice it to say that I think this entire issue is a purely fabricated display of childish [...]

  29. DeDude says:

    @DuchessGateau;

    There is a difference between spending and borrowing and congress still have full control over both. Borrowing is the consequence of spending more than your revenue. Congress authorize all spending. If they don’t want more borrowing to be done then they simply have to pass a budget that balance spending to revenue. The moronic situation right now is that after having passed budgets that are not in balance some of them can have tantrums and refuse to allow the executive branch to do the borrowing that is the only natural consequence of the unbalanced budget. Putting the good name and credit of the US in doubt because your presumptions were unrealistic or you refuse to accept the consequences of the budgets you passed is not acceptable. There should be no limit on borrowing except that we obviously will not borrow more than required by the imbalance in the budgets congress pass.

  30. vermcj says:

    While “the fiscal cliff” might be much ado about nothing, for investors, it is going to cost families several thousand dollars, in taxes. To me, that is “ado,” which I cannot afford.

    ~~~

    BR: While I appreciate that, this site has a specific focus

  31. TacticalMan says:

    BR, Your premise that the “Fiscal Cliff” was a loser’s response to the election is silly. This is something that was baked in the cake by our feckless Pres and Congress at their last round of talks. The pres went ahead w/ the Repubs in those talks because he wanted to win re-election and knew that increasing taxes would reduce growth. The Repubs calculated that OBAMA! would lose the election. Had Romney won, it would be less of a discussion because Romney wanted to reduce rates. With OBAMA! deciding he has the upper hand and no election to worry about, it will be a big deal. As one of your readers noted, check out 1937 and what an arrogant president and a smaller amount of increased taxation did.

    Also, in response to your somewhat sarcastic remark regarding the “Great Recession ending June 2009,” the confusion is with the way GDP is calculated. I understand the details. The problem is they include all spending but don’t deduct for debt (which is just future taxation). If I use a credit card to double my spending I’ve increased my GDP. I’m also in a world of hurt, especially if I don’t have any good stuff to show for the spending. Govts borrowing money to give to other govts to pass on to favored constituents is a great way to get votes but it didn’t truly end the recession other than as an academic exercise. The end won’t really come until people accept that borrowing money for purposes of transferring wealth doesn’t create real growth.

  32. DeDude says:

    @TacticalMan;

    Actually in a society as unequal as our “transferring wealth” is one of the few ways to create real growth. The investor class has gotten so powerful that one of the few remaining ways of getting more money to the consumer class (the only engine or real growth) is by way of borrowing to transferring it.

  33. TacticalMan says:

    Our society is only unequal in the sense that old people have a lot more than young people due to a 40 year govt mandated wealth transfer and that married people have a lot more than single female heads of households.
    If I give you my money, that creates 0% growth. Nothing has been created. Growth is created by more people plus innovation and increased productivity, both of which require capital. If I give you my money, I can’t innovate or increase productivity.

  34. [...] The Fiscal Cliff Hype.” For more, check out a recent post by Barry Ritholtz on the same subject: Fiscal Cliff: Much Ado About Little I don’t know who “today’s Rukeyser” is … but Eddy (and Barry) are steadying and [...]

  35. [...] a number of excellent commentators (led by Barry Ritholtz in The Washington Post; more here) are banging the drum for the idea that the fiscal cliff is more of a slope than a cliff and [...]

  36. ES says:

    Barry, you are going to be wrong on theis. The tax increases are signficant. 5-10% tax increase has real meaning, it could potentially swallow half of people’s disposable income.
    What many posters in the lower tax brackets don’t realize is that once you start getting up there, over 100K -150K you start losing many deductions because you make “too much” and you start getting hit with AMT. This can result in tax increase of over 5%.

  37. Lugnut says:

    I tend to take a different slan on this from Barry, whose post I viewed as more of a backhand towards the media an Republicans rather than an analysis of the basic issue. Again, he’s looking at it through the prism of an investor, so its effect is likely more muted within those circles.

    That said I am confused that :

    A) The media pundits like to portray it as an economic tsunami in the making, when it should be viewed as ‘A good start’, given the background of accumulated debt and the budget deficit it should be juxtaposed against.

    Lets face it, we’re only talking about 1/4 of 1 percent spending cuts here. $55BB in reduction in military spending against $710 annual spending won’t exactly eviscerate our force projection capability. The total cuts barely approach 10% of the annual budget deficit.

    B) The Democrat only want to talk about tax increases, with no spending cuts whastoever. Apparently $3.8 Trillion dollards is the absolute minimum we must spend in orer to provide the basic services of the republic. I remain unconvinced. The Republicans on the other hand only want to talk about reduction of spending on entitlements to citizens, with nary a thought to adderssing any other part of the Federal spending. OK to take money out of Joe 6Pak’s wallet before we allow the rest of the government to be touched, I suppose. No doubt Medicare needs to be addressed, as any student of exponents and geometric progressions will tell. $7 Trillion per YEAR in unfunded Medicare and Soc Sec liabilities? 100% taxation of all earners over $250K won’t solve that little math problem.

    Perhaps the media should lend a little more scurtiny to these facts.

    The math don’t lie kids, just ask G-Pap from Greece. Sooner or later all this hand wringing and can kicking over dealing with just few perccentage points of the larger monster will become laughable.

    or lamentable.

  38. vermcj says:

    To Mr. Ritholtz: Thank you for commenting on my comment by writing that this (my taxes would go up several thousand dollars a year if the “fiscal cliff” goes into effect) was not the focus of this blog. Howcver, this blog’s “headlines” have “Macro prospectives on … economy…” I think people’s tax is a prospective on the economy, as tax increases and tax decreases certainly have a profound effect on the macro economy. So, I think my comment was pertinent and was worthy of being addressed.