Brinkmanship Alive and Well in DC

12/19/2012 9:45 am EST

Focus: MARKETS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

It seems that the great political game of brinkmanship can still be dusted off and given tour around Washington, the real question is if the politicians have the skills to manage it wisely for the nation observes Bryan Perry of Cash Machine.

The impasse in Washington to resolve the pending fiscal cliff has definitely raised the level of volatility. However, contrary to what many had predicted, the major averages are holding above key support levels on the belief that there will be a down payment of a larger, grand bargain deal that both sides will come to terms on before December 31.

There is also this odd and almost surreal idea being circulated that the scenario of going over the edge isn't so bad. After all, it cuts spending by over $1 billion and raises taxes on those who are defined as affluent.

In either case, as far apart as the Dems and GOP are on inking a deal, the stock market is feeding on one-time special dividend declarations, improving consumer optimism, stronger housing data, upbeat car sales, and events outside the United States that are raising hopes of a better global economy.

Aside from the cease-fire in the Israeli/PLO situation, the leadership change in China promises to invoke more fiscal stimulus to perk up that economy's growth rate toward 8% GDP. Japan is about to elect new government leadership, which has also put a blueprint for new quantitative easing to work following the elections this month. And Europe is seeing the euro and its streets stabilize after reports that bailout funds to Spain are being verified.

European peripheral yields are moving sharply lower on word that Spain has made a formal request for EU bank bailout funds. The announcement falls short of a sovereign bailout that many are anticipating.

The move lower in peripheral yields also comes despite the recent announcement by Moody's that it had lowered the ESM/EFSF rating to AA1 from Aaa. The downgrade comes after the rating agency also recently lowered its rating on France, the second largest contributor of the fund.

Longer-dated Spanish yields are down to their lowest level since March. A 14-basis point decline has the ten-year bond yield down to 5.17%. Elsewhere, Italian yields are also moving lower, with a 14-basis point decline dropping the ten-year bond to 4.33%, its lowest level since November 2010.

The evidence of Europe being technically in a recession—and yet not tanking the rest of the global economy—is contributing greatly to the market's resilience. Oh, how the markets love the business of unlimited bailout funding.

If the prevailing view were that going over the cliff would trigger a serious recession, we wouldn't be seeing the price of crude oil trade back up to $90 today—not with the United States still being the largest user and net importer of oil. The "market tell" here is that China is ramping growth that energizes the emerging markets, Europe is going to be OK, and most stocks that Americans own are in retirement accounts and thus sheltered from the implications of the elimination of the Bush tax cuts.

I think this combination of factors is accounting for the green arrows. We are definitely going to have a December to remember. It will go down in the history books as one where Congress enacted legislation before leaving for vacation and markets ended the year on a big uptick...

Or one that has everyone holding their breath after New Year's Day, waiting to see who gets the 2 million pink slips in the mail when the $1 trillion plus in government program funding comes to a halt and income taxes are hiked on middle- and upper-class wage earners.

Related Reading:

Inflation Countdown in Final Stages

What Today's Best Stocks Say About 2013

The Real Indicator to Watch

 

Related Articles on MARKETS