Arguing semantics over cuts here, taxes there, we are close, etc. misses the entire premise of the entire political debacle that is now replaying in Washington. The simple fact of the matter is that our politicians will not cross the aisle, will not compromise, will not 'come together', will not 'rise above', will not 'think of the children' - until the market (that critical arbiter of everything that appears relevant to the elites) forces their hand. The following three charts should help clarify that for all market savants.
1. Political Polarization has never (NEVER!) been higher - and so expectations of any of these so-called men doing what is right is a joke...
2. Our Stock Market can do no wrong - thanks to Bernanke's (and Draghi's) visible hand, any concerns over downside scenarios are now so unambiguously removed from the distribution of policies that the supposedly efficient markets no longer reflect any discounting but merely the marginal veracity of the next flashing red headline (as we noted earlier ).
3. Until Our Stock Market Sends The Message - just as with the debt ceiling debate, hope and belief and some level of "they'd never let us, would they?" phantasma remains in the US investors' psyche still - that is until the politicians cross the line. At that point, our markets recognize their role and reflexively react and enforce discipline and action in Washington
(note: we first showed this 2011 analog two months ago and were met with the usual derisive comments with regard - that could never happen again - seems like we are following a very similar path of hope and belief and now a little fear)
Unless and until we see a major correction in stocks, we highly doubt that any actual resolution will be announced - no matter what the spin or hope on every conference call and press conference.
Bonus Chart: it's not just Stocks that are following last year's Debt Ceiling debacle - VIX is following along very closely. The following chart shows the term-structure of VIX is moving exactly as it did last year - i.e. a higher point on the chart means the short-dated VIX is rising relative to medium-dated (and if it is >1, then short-dated VIX costs are greater than longer-dated) - clearly the current cliff debate is raising short-term risk concerns in a similar way...