Why I Paid Up For That Negotiations Class

Tyler Durden's picture

Via Michael Naso of FBN Securities,

I attended a business school which hosted classes where the demand for a seat easily outdistanced the supply.  To assuage the imbalance, the administration allocated auction credits to the students for their bidding on various sections.  Thanks to a dynamic professor and the practical subject matter, an offering in Negotiations consistently owned the highest clearing price for those trying to gain access to the course.

Spending over 50% of my two year allotment on this single topic was well worth the price of admission.  Not only were the lessons taught helpful when navigating large personal purchases such as an automobile or a house, but they also provided a guide in trying to predict the behavior of the major players engaged in the current fiscal cliff debate.  Frankly, based on what I learned, I question the most recent tactics enacted by the Administation.

I had written in Wednesday’s “Missive” of Senator Reid’s frustration that progress had stalled as he blamed the Republicans for not bargaining fairly in trying to iron out a compromise.  This declaration signaled to Speaker Boehner that the Democrats will play hardball as well.


However, yesterday’s Wall Street Journal article, via quotes from Erskine Bowles, claimed the White House will be flexible when proposing a raise to the top marginal tax rate.  This perceived increase in the probability of a near term accord appropriately rallied stocks aggressively to produce the first outside reversal since the session that spawned the bounce off the November 16 trough.

I question why Mr. Obama would leak his best alternative to a negotiated agreement (BATNA) so early in the process, for classic bargaining strategy suggests keeping that information close to the vest as long as possible.  Moreover, since the Senate already has passed legislation that augments revenue only via the higher income levels, the President had enjoyed the upper hand in the debate.  He may have forfeited that head start on the release of yesterday’s comments.  More troubling, given the ideological divide between the two factions, this newfound willingness to compromise may actually transpire to an intractable divide as we move closer to year end.

From the Republican standpoint, the Administration’s concession generated an odor of weakness such that Mr. Boehner has no incentive to budge from his stance of rejecting a hike to marginal rates.  He can reasonably assume that the White House’s new position does not represent its BATNA such that the Speaker’s potential of getting his most preferred outcome is very much in play.  Logically, he will press that advantage.  On the other hand, if the Democrats actually did announce their final offer more than a month ahead of the New Year, then, in theory, they will not shift either forcing an unfortunate stalemate between the two parties.

Complicating matters, Mr. Obama declared a preference to strike a deal by Christmas which approximates the Friday, December 21 “zero barrier” I have written about previously.  If we push past that date without a formal agreement, it behooves the President to sit on the ball and run out the clock.  Immediately after going over the cliff, he would simply present the aforementioned Senate bill that increases rates only on income over $250K as a tax cut to House Republicans.  Couched in this manner, such legislation will be very difficult for the GOP to reject especially if the market has dislocated in the interim.

Ironically, if the Republicans acquiesce to yesterday’s posturing by Mr. Bowles, then the likelihood of a Moody’s and/or Fitch downgrade rises, for the ratings agencies would almost assuredly be disappointed by a lower than anticipated level of incremental revenues.  If Mr. Obama somehow manages to overcome Wednesday’s misstep to achieve his optimal course of action, then the “resolution” would dent an already fragile recovery as exemplified by an extremely weak New Home Sales report.  That is the punch line of this whole dilemma, for no matter what path the negotiations traverse, the ultimate outcome will produce at least some negative consequences.

In the short term, I expect the Democrats’ apparent flip toward compromise will rally equities especially in light of money flows that often arise with the turn of the calendar.  This suggests we should continue to grind up through Monday evening.  As we move deeper into December, the headline chasing environment will only exacerbate as the “theta” of the risk premium associated with the fiscal cliff increases daily without the consummation of a deal.  If the tape continues to afflict investors with a serious case of whiplash by tracing 25 handle intraday ranges for the S&P 500, managers will have difficulty putting money to work amidst the skittishness.

Lost among the sparring in Washington was significantly downbeat comments made by Chakravarthy Rangarajan, India’s economic advisor to the Prime Minister, who acknowledged that its top 10 global economy is “going through a difficult phase.”


Combined with China and its unraveling equity market, the hope for a stimulus rising out of Asia has dimmed.   Thus, while prospective cooperation in managing the budget crisis would generate a snapback in early 2013 as consumers and businesses release pent up demand, the longer term prospects for the U.S. recovery will continue to stumble as the rest of the world jogs in place.

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Orly's picture

You're assuming it is his BATNA.  I think it is to strike a deal on entitlement reform and income tax reform, myself.

JPM Hater001's picture

Not sure myself but does something smell Mayan in here?

NotApplicable's picture

Since when do puppets negotiate, or even have a batna?

As always (and seemingly ever more often), this is another presentation by the Kool-Aid Corps.

Negotiation class is one thing. Having the ability to spot the TRUE actors is quite another. Applying lessons to non-actors is but an exercise in misdirection.

Anybody who believes this shit is real has not a clue.

Seriously, professional wrestling is more believable.

LawsofPhysics's picture

Negotciations?  Shit, if you can't touch or defend it, you don't own whatever "it" is.  

By the way, the rest of the world is not "joggin in place".  The BRICs are very much investing in their own people, their own technology, and thier own infrastructure.  what a dumbass.

FL_Conservative's picture

Don't give this ineptocracy any more ideas or they'll re-commence funneling trillions to their crony green-energy constituents.  Keynesians don't understand this "investment" concept.

LawsofPhysics's picture

And when the BRICs all have sustainable electrical grids generating local energy and the U.S. doesn't, tell us, who will be more suspectible to an EMP at that point?  Pull you head out of your ass and look around, are you saying that we should allow the old technolgy to simply deteriorate and this will somehow be good for the economy?  Better yet, let me guess, you probably think another unfunded war will fix the economy.  What retirement home in florida are blogging from?

I'll expect lots of junks without any responses to facts because that is how those florida RINOs roll.  The reset can't come fast enough.

Stupid fucking sheep.

pods's picture

LOP, clearly the desire for most humans is to just live their life.  The smaller our footprint the better, sustainable being a fantastic goal.

That is also the worst possible scenario for our current system.  No expansion, kaboom.

We should all be hitting the gas when it comes to government debt, albeit not through war.  More debt=quicker collapse.

Then after the collapse (or reset), we can shoot anyone who suggests the merits of fractional reserve banking or legal tender and work on the small things in life again.


LawsofPhysics's picture

won't matter, expansion/growth is not possible in the current eCONomic system.  Available energy for delivery has flatlined and the energy that needs to be invested just to get more energy continues to climb.  Humans have always been at war for power and control over real resources.  Some things never change, and yes I agree on your suggestion regarding anyone who promotes another ponzi (which is all the fractional reserve system is).

pods's picture

Yeah, but the need for growth/constant expansion is merely due to our monetary system.  We would not be in near the predicament that we are in if we did not have to have YOY growth just to survive.

Compound interest is a bitch!


LawsofPhysics's picture

"Compound interest is a bitch!"


Indeed. Many successful families have come before you and yours.

They want their rent (money for nothing).

Now pay up.

NotApplicable's picture

Well, that's why they've embarked on the grand ZIRP journey.

To infinity, and beyond!

venturen's picture

You mean like Spain with all that "free" sustainable electric that help bankrupt the country? Solar and Wind are a joke that work 20% of the time and cost a fortune... Denmark's largest "sustainable" engery is BURNING WOOD the highest Co2 energy.... Solar and Wind are just costly bribes!


LawsofPhysics's picture

I wouldn't do anything like the europeans.  How about coming up with our own innovation.  Novel conept eh?  No, you are probably right, spending our capital and resources on being the world's fucking police is a better idea < sarc off >

Stupid fucking sheep.

FL_Conservative's picture

Who you calling a Florida RINO and wanting another unfunded war?  Talk about having YOUR head up YOUR ass.  You don't know the first thing about me or what I think, other than my contempt for Keynesian central planners.  You think your the smartest fuck around here?  Well you're not.  So quit painting the world as you see it with that broad brush of yours.

Zap Powerz's picture

If only any of this mattered and had any effect on the downward trajectory the US is on at terminal velocity.

nofluer's picture

for the ratings agencies would almost assuredly be disappointed by a lower than anticipated level of incremental revenues.


Looks like the ratings are gonna go down then as no matter how much Obama & Co raise taxes, the agencies WILL be disappointed. (See Hauser's law.)

overhere2000's picture

Not sure the Game Theory folks would agree with your assessment. But interesting missive.

CrashisOptimistic's picture

Tyler, the agencies are at the end point.  After all, if "avoiding the fiscal cliff" is, by definition, avoiding any significant reduction in the deficit then how could the agencies not do a downgrade?

Answer: If they are threatened.  That's how they don't downgrade.  If they are threatened.

the not so mighty maximiza's picture

No matter if they  the fuck'um, suck'm or kill,um the interest rates rates are going to go up.


NotApplicable's picture

Up? That would require a market, and I don't see one of those anywhere!

Tsar Pointless's picture

Seriously, people. If you don't think there is a plan already in place for after the final act, then you didn't pay attention to 9/11 (Patriot Acts I & II) and the 2008 financial crisis (TARP).

This is just for show. For public consumption. Remember: we are CONSUMERS - first, second, and last.

JPM Hater001's picture

Yes, the history books are already written.  We are just watching this unfold on the canvas of life.

Dan Conway's picture

The image that keeps coming to mind is the one of Chamberlin waving that piece of paper signed by Hitler.  It is impossible to stop the invevitable. 

docj's picture

Senator Reid’s frustration that progress had stalled...

Oh, poor baby. Pass a fucking budget, asshole - it's only been, like, 3+ years since you've last done something so basic.

Then you can complain about other parties' "playing hardball".

LawsofPhysics's picture

Better still, give him everything he wants and let him be solely responsible for the outcome.  The reset will come much faster.

InconvenientCounterParty's picture

Passive-aggressive behavior is self indulgent and emotionally immature. It adds no value to matriculation of human memes. You might consider something more active, like burning books.

LawsofPhysics's picture

You probably shouldn't respond to it then.  Unless the underlying moral hazard is addressed, nothing will really change.

Zap Powerz's picture

Pretend inferiority and encourage his arrogance.

All war is based on deception.

--Sun Tzu

Sun Tzu advocated passive aggressiveness (a form of deception).  He did not advocate burning books.  Perhaps the Art of War is too subtle for you?

LawsofPhysics's picture

Bingo.  We studied Sun Tzu at OCS.

Zap Powerz's picture

I like this idea a lot.  In fact, just this morning when I was in the shower I was thinking I needed to write my congressman (R) and tell him I full expect him to vote to raise the debt ceiling and do everything the democrats want to do.  Give the D's everything they want or at the very least, do oppose what they want.  Why not? Crash is inevitable.  Who cares if its tomorrow or next week?

pods's picture

My thoughts exactly.  We do need to educate as many people as possible as to WHY this crash is happening though.

Otherwise the "fix" will be a supranational fractional reserve currency, and we will just restart the debt slavery system.


zapdude's picture

You nailed it Pods. 

I fully expect a psuedo-one-world-currency to emerge from the next global financial meltdown. 

Which could happen anytime.

I just hope gold goes along for the ride, and can then be safely converted into the new "United Earth Credits" when the dust has settled.

LawsofPhysics's picture

Go long black markets, there will be a paper price, and a physical price for everything of real value.

NotApplicable's picture

Which will only exist on your Visa Debit/Credit card.

Mark of the Beast, bitchez!

kralizec's picture

Agreed.  Arguing over the outcome is pointless, reality is not optional, arguing over the timing is merely amusing.  All things being equal I prefer to advance to the end game sooner not later.

Dan Conway's picture

Reid is upset because he is essentially odd-man out in this negotiation.  He can only be nuisance at this point.  He is probably more a nuisance to obummer than to boehner.  However, it just doesn't matter since none of the negotiations are attempting to solve the problem. 

Seasmoke's picture

so be it, off the cliff then.........WE ARE FLYING !!!

Dr. Engali's picture

12/21.... Where have I heard that date before?

Dr. Richard Head's picture

That will be a newly announce retail holiday, called it Fucked Friday, where consumers most in debt will be able to double their credit limits for one day to boost GDP, then magically the US will grow its way out of debt.

XitSam's picture

"Don't call my bluff, Eric." -- Barack Obama

buzzsaw99's picture

some fine kabuki theatre, primping, preening, posturing, bloviating

Dr. Richard Head's picture

Sit on the ball and wait till market responds with a crash and then rush through some more theft?  Ummmmmm very TARPesque. 

Confundido's picture

There will be no downgrades of US sovereign risk. If necessary, they will force a negative risk weight! (i.e. from zero) to US Treasuries...:)

Winston Churchill's picture

Does it matter ?

Only player left in the bond market is the FedRes,and

that supposedly ends Dec.31st.

We don't need no stinkin rating agency's.

Panafrican Funktron Robot's picture

Yeah, not sure why anyone thinks there is a good outcome even possible here.  Either we "go over the cliff" and stocks shit the bed, or we don't go "over the cliff", and US debt gets downgraded again.  Mind you, yields will be propped anyways via Fed buying, but it would be a disaster for the petrodollar scheme.  Pick your poison.  

Count de Money's picture

The Republicans are idiots if they seriously think that the Democrats are interested in compromise. Obama and the Democrats have always been "If we can't run this country, we'll burn it down."

The solution: Let them burn it down. If the Republicans were smart (which they're not), they would let the Democrats bring whatever they want to a floor vote, let it pass, and make sure everyone knows it.

Confundido's picture

If the Republicans had been smart, they would have voted Ron Paul for President in the primaries. 

LawsofPhysics's picture

You assume that there are two parties and free and honest elections.  there aren't.  There isn't a free market either.  Please wake up.  Let them burn it down.  At least then compensation will make it's way back to people who are actually worth a shit.