Never Underestimate Wall Street's Ability To Overestimate Washington
This is a true but hard-to-believe story.
Last October, when I was talking one-on-one with a number of hedge funds and other Wall Street firms about what the anything-but-super committee was likely to do, I repeatedly came face-to-face with almost total disbelief when I predicted that the committee was highly likely to fail and the sequester would be triggered.
My most incredible discussion was with one manager adamantly insisted that the hardly super committee's members would "be embarrassed" (that exact quote is still hard to forget) if it failed and that alone meant that an agreement would be reached. Nothing I said about how hard it is to embarrass a member of Congress could change the manager's mind.
Honestly, I was stunned by the lack of understanding about how Washington works from the people on the street who were responsible for recommending investment decisions based on what the House, Senate, and White House would do.
In case you're wondering, I resisted the urge to gloat when my prediction turned out to be correct.
I had assumed that Wall Street had learned from its mistakes after the total failure of the Bowles-Simpson commission, the debt ceiling debacle and the anything-but-super committee's inability to agree on anything. But this Associated Press article from this morning that's available on CNBC.com shows that the prevailing opinion on the street is still that Washington is a rational place where the right thing (at least as far as the financial markets are concerned) eventually will get done because the opposite is unthinkable.
From what I can tell, there's nothing wrong with the AP story; it accurately reflects the current sentiment of a number of Wall Street analysts that Washington is going to avoid the fiscal cliff. They may be right, but it appears to me that once again Wall Street is overestimating Washington's propensity for rational decision making.
Completely contrary to the opinions expressed by the Wall Street analysts quoted in the AP story, and as I've been saying for a while, we're more likely to hit the fiscal cliff (I put the odds at greater than 50-50) than is being generally assumed for five reasons:
1. It's becoming increasing understood inside the beltway that the fiscal cliff is really more of a fiscal slope and the U.S. economy won't actually come to an end on January 1, 2013.
2. Assuming the GOP retains control of the House, John Boehner may have to let the fiscal cliff occur to stay as speaker.
3. Lame duck sessions are just about the hardest time to make major policy decisions and this one may well be worse than most.
4. If Obama is reelected, the Republican party is likely to move further to the right rather than to the middle and the fiscal cliff will be its first test after the election.
5. If Obama is elected, the White House is far more likely to press the political advantages the fiscal cliff gives it on taxes and spending to get concessions from the GOP because this may be the only time it has this magnitude of leverage.