The Most Critical 48 Hours In The Fiscal Cliff Melodrama Have Begun

There is now about 48 hours until the rubber hits the road. What happens in the next 2 days: in a somewhat surprising development earlier, the Republicans today managed to turn the tables on the president, and as reported this morning, proposed an alternative "Plan B", one which the president has already said he will not to accept as it extends the current Bush tax cuts on all those making $1 million or less (and thus not nearly punitive enough in the eyes of Obama's electorate). The reason for this strawman is that unless Obama settles on some compromise definition of 'wealthy' between his already adjusted definition which moved from $250,000 to $400,000 earlier, and the $1 million cutoff proposed by the republicans, republicans will take the Plan B proposal to the House on Thursday and pass it, only so it is immediately voted down by the Senate, but have the popular backstop of saying "they gave it their best" just as Ken Langone suggested to Rand Paul earlier today on CNBC. And as Reuters reported, it appears that the drop dead date for House majority leader Cantor is Thursday, at which point he will vote, and pass, Plan B. At that point the Fiscal Cliff debate for 2012 is as good as over, as the resulting animosity that develops in the subsequent days will guarantee no further compromises are achievable for the balance of the year.

In other words, tomorrow is when all the horse trading will culminate: if there is no resolution by the end of day, the Thursday Plan B vote is all but assured, as is the resultant Risk Off phase, especially for all those who saw in today's moves yet another glimmer of a compromise when in reality it was all merely the latest and greatest big PR stunt. In the meantime, trigger happy algos will send stocks moving wildly in eiuther direction based on headlines over the next 24 hours, although the consensus is that following the massive overbought surge in stocks in the past month, that a fiscal deal is now largely priced in, and a sell the news event is likely to result following a firm agreement... assuming one comes of course.

From Reuters:
After important concessions in recent days from both President Barack Obama and House of Representatives Speaker John Boehner, Republicans moved to increase pressure on the Democrats by vowing to vote in the House on a "Plan B" back-up measure that would largely disregard the progress made so far.

The Republican proposal was part of a political dance by both parties to try to spin the "fiscal cliff" narrative in their favor even as they edged closer together. The White House rejected the offer but remained confident of an agreement.

"The president has demonstrated an obvious willingness to compromise and move more than halfway toward the Republicans," White House spokesman Jay Carney told reporters, adding that Obama is making a "good faith" effort to reach a compromise.

House Republicans were still meeting to discuss the matter on Tuesday evening.
Why did the market surge today? Because it shared the same view as this espoused by Republican Tom Cole:
"They've still got a long way to go, but you can't help but say that the odds are better today than they were on Friday that we'll get some sort of agreement," said Republican Representative Tom Cole.
Maybe. Maybe not. Based on some preliminary reports, numerous conservatives in the House are still fuming over the concessions already granted by Boehner. As National Journal explains:
A second aim of Boehner’s Plan B strategy is clearly directed internally—at grousing House Republicans. He is telling members of his conference who are restive that he will cave more significantly on taxes now that it is as much on their shoulders as his--because they can cut bait on his negotiations or wait them out. He’s not going to take all the heat for any eventual deal they don’t like.

One senior House Republican aide said that some members have been saying they've had it with the private negotiations between Boehner and the White House, including some who believe these talks should be held in an open conference. What Boehner is now offering, the Republican aide said, is, “We can do something else, if you want.”
A just as big problem is whether a schism will develop in the Democrat party, many of whom see no reason to budge on the $250,000 definition, especially in the aftermath of Obama's trouncing victory.
Obama could face unrest from fellow Democrats. Liberals were likely to oppose a key compromise he has offered to permit shrinking cost-of-living increases for all but the most vulnerable beneficiaries of the Social Security retirement program. His proposal calls for using a different formula, known as "chained Consumer Price Index," to determine the regular cost-of-living increases, essentially reducing benefits.

"I am committed to standing against any benefit cuts to programs Americans rely on, and tying Social Security benefits to chained CPI is a benefit cut," Democratic Representative Keith Ellison said in a statement.

Obama also moved closer to Boehner on the proportion of a 10-year deficit reduction package that should come from increased revenue, as opposed to cuts in government spending. Obama is now willing to accept a revenue figure of $1.2 trillion, down from his previous $1.4 trillion proposal.

Boehner's latest proposal calls for $1 trillion in new tax revenue from higher tax rates and the curbing of some tax deductions taken by high-income Americans.
No matter the final resolution, it appears that the payroll tax cut holiday is over starting January 1, which as reported previously alone will have an rather adverse impact on Q1 GDP. In fact, with all carryovers, even assuming a compromise is reached in the next 48 hours, the hit to GDP in 2013 will be about 0.5%-1.5%. But at least the economists will have something to blame yet another economic miss on, for an economy whose quarterly scorecard is starting to be pockmarked with one-time charges, and "non-recurring" fees to the same extent as Alcoa.

So keep a very close eye on tomorrow's news flow: the next 24 hours is when any hints of a final compromise will have to come. If there are none, bring a helmet.

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