Washington passed a fiscal cliff deal that honors the most famous cliff diver in history - Wile E. Coyote. Just as Mr. Coyote obtained complex and ludicrous devised plans from a mail-order company Congress cobbled together yet another bill that pretends to have answers but leaves lots of questions and more frustration.
Just as the template for the Road Runner cartoon saw contraptions used by Wile E. Coyote "invariably fail in improbable and spectacular ways" each issue that gets resolved in Washington these days is doomed to failure. Part of the reason failure is inevitable is because core problems are not only not addressed, but often they are worse after would-be cures have been applied. The thing is, the United States economy is as durable as Mr. Coyote - we can take a lot of hits and stay in the game...until we can't anymore.
That being said, you have to be in the market making changes to exposure but not panicking. Picking the point of implosion is next to impossible and I will tell you now the global economy is going to rebound this week and that will carry a lot of American-based companies. There is a disconnect masked by the notion the stock market is a report card on the US economy. It used to be that way, but over the last fifteen years it's changed dramatically. Add in the fact Wall Street loves all the money-printing of the Fed and we have ample reasons for a much higher stock market even as, like Mr. Coyote, our economy will end up "burnt to a crisp, squashed flat or at the bottom of a canyon."
While Silicon Valley, Hollywood and Wall Street firms with huge pockets and sweet profit margins made out in the fiscal cliff deal small businesses took a hit and that means American job creation will take a hit as well. You see, when the White House says only a few small businesses will be hit it never mentions these are the businesses that are hiring.
While saying the fiscal cliff deal is a further step in clarifying the medium-term deficit and debt trajectory it "does not, however, provide a basis for a meaningful improvement in the government's debt ratios over the medium term." Moody's ratings agency put the onus on upcoming battles as last chances to lower future budget deficits. If the problem isn't addressed (read fixed with real decreases in spending) in upcoming battles the agency is likely to lower America's credit rating. I'm not sure how the Street will react to this warning but hopefully it influences Washington.
Rich and Connected Win Again
I find it fascinating how the rich and well-connected continue to reap rewards no matter what party is in office and no matter the mood of the general public. While President Obama didn't lift a finger to stop more than 100 million working Americans from having to pay more taxes his buddies in Silicon Valley and Hollywood get gigantic economic gifts from the fiscal cliff deal. I wrote about the R&D benefits mostly helping Silicon Valley yesterday but there are other friends of Obama cashing in big time.
$9.0 billion extension of active financing exception for manufacturing and banks (helps to offshore jobs)
$1.2 billion for renting in Liberty Zone around WTC (Goldman says thanks a lot - no wonder Blankfein loves the deal)
$430 million Hollywood deal that began years ago to help small struggling filmmakers; now individual television episodes can get up to a $20 million break
$331 million railroad maintenance
$222 million excise tax on rum returned to Puerto Rico and Virgin Islands
$70 million NASCAR accelerated write offs
$4 million electric motorcycles
$1.0 million treats coal on Indian land as alternative fuel
Small Business Still Short End of Stick
When all of this happens I'm not sure but it will be stealthy, even on days when the Dow is up 300 points it will not register as a sign to move away from bonds. Instead most investors will be caught flatfooted, hence the need to overcompensate via stocks - particularly high growth stocks that afford outsized valuations.
Hussman's Open Letter to the Fed; The Problem with Bubbles; Textbook Pre-Crash Bubble; Reflections on Not Chasing Bubbles; Integrity vs. Respect | Mike Shedlock