Supercommittee dithers, Wall Street yawns (for now)
There were high hopes when the Joint Committee on Deficit Reduction (aka "the supercommittee," now one word, which means it's really important!) was formed after the debt ceiling deal was settled in August. Six Republicans and six Democrats were charged with finding a way to slash the nation's government spending by $1.2 trillion over the next 10 years.
One senior Obama administration official told me that the formation of the supercommittee was "pure genius," because it was created not by some flim-flam executive order, but through a Congressional statue. The committee's statutory basis was supposed to make it real and it had another advantage: it required a simple majority, which would then go to Congress for an up-or-down floor vote by December 23rd (Merry Christmas!), thus circumventing the filibuster process.
Here's the interesting part: if nothing gets done, then there's a trigger: An automatic $1.2 trillion in spending cuts will occur over the next ten years -- half from domestic spending (Social Security, Medicaid and a few other programs for low-income Americans would be spared) and the other half from the Pentagon.
My oldest friend, Mark Spindel, who is now a hedge fund manager (Potomic River Capital, LLC) has described the structure as "the exploding can." While committees, Congress and presidents all have had a bad habit of kicking the can down the road on any difficult decision, this can will explode, triggering a lot of collateral damage.
Both ratings agencies and Wall Street investors have seen the exploding can as a good thing. Regardless of what the politicians do (or don't do), there is an expectation that $1.2 trillion in deficit reduction will materialize. This kind of discipline and focus on the debt is seen as a positive for the long-term stability of the country and the absence of political monkey business is a positive for markets.
Here's the bad news: if the supercommittee disarms the trigger and then cobbles together some last minute, "super-duper" committee to address budget reduction in the future that looks good, but doesn't tackle the unavoidable root problem of the nation's exploding debt, then at some point next year, ratings agencies and investors will have that debt ceiling déjà vu all over again feeling and the result will be a stock market swoon that could make it feel like August in February. As usual, there is rarely "pure genius" in anything that comes out of Washington DC these days.
