Cliff Notes, Fiscal Style — 12/12/12

Anyone who made it through college remembers "Cliff Notes."  As a professor, one of my jobs was to identify students who had read the real work.  Who were the imposters?

Now I am on the dark side!

Investors can join me with our Fiscal Cliff Notes.  There are so many pretenders, and so little real information.

I have repeatedly warned that the entire discussion is a costly distraction for most investors.  Here are the leading characters in the noise game:

  1. The TV Anchors.  Sports fans see this constantly.  If you are a sportscaster or "color man" you need to keep talking, no matter what is happening.  It is a demanding job, leading to a lot of stupid commentary.  One of my favorite sports websites is Awful Announcing, where viewers and readers send in their favorite nominations for the blooper of the week.  With the massive and excessive coverage of the Fiscal Cliff, it is easy to find the blooper of the hour.  (Examples below).
  2. The Pseudo-Experts.  Someone who knows absolutely nothing about what is happening makes a statement.   If the prediction is dramatic, it gets attention.
  3. The Former Star player.  Someone who used to have power, and wants to maintain the image. 
  4. The Wannabee.  Often someone without any special knowledge or credentials who wants to seem important.

Bad Commentary

Here are some typical examples of poor commentary.  I could give (multiple) citations for each, but that is not the point.  If you are a journalist or TV anchor, you have a need for content.  Standards decline.  Readers are invited to offer more in the comments.

  • Breathlessly reporting every public statement.  This is silly.  The real negotiations are not happening in public and the statements are not really news.
  • Calling the participants "kindergartners" (or worse).  This sort of opinionated commentary simply shows a complete lack of understanding of the process.  It has become a staple at CNBC, where they are on 24/7 cliff watch.  No doubt they will claim credit when it is all over.
  • Most of the public affairs news shows.  Normally the Sunday morning shows are helpful.  I record and watch several of them every week.  This week we got to see a posturing Newt Gingrich, who made dramatic statements.  It was obvious that he was not in touch with what was really happening.  The group on ABC included a lecture from Paul Krugman and a responding attack on Krugman's motives from George Will.  There was a disappointing lack of substance, mostly because the panel had no real information.
  • The claim that the market expects a resolution, and has priced it in.  With more than half of the public expecting us to go over the cliff, a parade of TV pundits saying the same thing, and the anchors themselves emphasizing this conclusion — it should be obvious.  The issue is in doubt.  Whenever this is the case, the market will move one way or the other on the outcome.

The message should be clear:  You cannot infer progress, lack of progress, or substance from any of these public statements.  What a delight!  You can ignore the news and just read the Cliff notes.

Real Information

If you want real information about progress, you need to look at unsourced reports from behind the scenes.  These paint a very different picture:

  • There is actual movement toward a compromise.  On the key tax issue, President Obama will relax the rate on the rich by a bit and the GOP will allow some rate increase on high-income taxpayers.  The key threshold might move from $250,000 to $500,000.
  • There will be a solution on the tax issues before year's end.  There is tremendous pressure for this on Republicans.  No one wants an ambiguous tax code going into the new year, and the main impacts are on GOP constituents.
  • Participants are trying for a pre-Christmas solution, but there are no guarantees.  It might drift for another week.


Any fair-minded people who use their business experience and general intelligence can understand the dynamics of the political process, even if they did not take my course in Poli Sci 101.  (One of my best teaching experiences was the standing "O" I got at the end of this class in my first semester.  It was a real inspiration for a young new Asst. Prof).

  • Deadlines.  Going down to the wire is typical in business.  It happens in labor negotiations, corporate buyouts, and new product introductions.  It is not the stuff of kindergarten, but rather what happens in the real world.
  • Significance.  These decisions will set the national course for many years to come.  They will be difficult to change.  It is important to get it right.
  • Publicity.  While the election is over, public support is still relevant to negotiating at the margins.  This is reality, and it occurs in labor/management issues as well.
  • Opportunity.  The most popular government programs cut taxes or increase benefits. The most difficult decisions do the opposite.  A lame-duck session of Congress is as far removed from politics as we can get.  There are retiring members and those with safe seats.  There is no better opportunity for making big changes and grand bargains.


My objective is to help investors understand what is going on without the need to absorb and interpret the avalanche of information.  Most of it can safely be ignored, but I'll follow up when there is relevant news.

Here is a final tip for traders:  If you see a news flash about a joint announcement (Obama and a GOP rep) that is bullish.  You will need to be watching and to buy quickly.

When should you sell?  Perhaps as the participants go to the podium.  Maybe sooner!

This year's Fiscal Cliff resolution will not be celebrated by all.  More in the next "Fiscal Cliff Notes."




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  • Grey Owl December 13, 2012  

    Excellent analysis, Jeff. But the end is confusing. You said: “When should you sell? Perhaps as the participants go to the podium.” And if they are going to the podium for the joint announcement? Or it is some irony that I do not get?

  • oldprof December 13, 2012  

    Grey Owl — Sorry for the ambiguity. I do believe that an agreement on the tax issues and deferral (with strong guidelines) for deficit reduction will represent a good solution for the moment. It will take the disaster scenarios off of the table.
    About five minutes after it is announced, there will be a parade of complainers.
    It was more of a trading comment. For investors, this will be good news.
    Good question — sorry for confusion — and thanks!