I know many of you hate when I pat myself on the back but here I go anyway.
After the election I predicted there would be no grand bargain to get the US fiscal house in order before the end of 2012, just a deal to kick the can down the road. That’s exactly what transpired.
The tax side of the equation has been worked out but the spending side has not been touched. It will have to be addressed quickly, in the next two months, for two reasons. One is the Treasury has about 2 months of latitude in juggling cash flows as it grapples with the statutory debt limit. The other is that the mandatory spending cuts that made up part of the fiscal cliff were rolled forward two months, not eliminated.
So this drama will play out again with the intensity increasing as we near the end of February. Odds of deep spending cuts and lasting entitlement reform are very, very low. Like Europe, the SS United States will have to hit an iceberg before dealing with its looming problems…
With that in mind, one should be cautious of playing risk-on too aggressively on the back of yesterday’s deal. I would not look to short risk but would be quick to book profits if overnight rallies start to fade.
