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Gabriel: Respect the Fiscal Cliff

While many factors suggest that a short-term deal to avoid the fiscal cliff will emerge, investors should remain cautious until Christmas. It's an unwelcome message, and may seem bogus if you're confident that a lapse of the Bush tax cuts or across-the-board spending cuts will be temporary, perhaps followed by a rally worthy deal.

Meanwhile, what about the Bernanke put? Shouldn't the message be, "Don't stray, the Washington sideshow will be brief"? "Hold your fire," sounds more like it.

There were small, seemingly conciliatory gestures on each side last week, most notably as Speaker John Boehner formally countenanced new revenues as part of a deficit deal and Obama administration officials expressed openness to generating new revenues through base broadening rather than hikes in marginal tax rates. But huge differences are emerging over what a "bridge," or down payment, during the lame-duck session should look like.

Boehner's "give" is offered in the context of comprehensive tax reform, to be matched by entitlement reforms that Obama heard an earful about from fellow partisans Tuesday. Meanwhile, read former Treasury Secretary Robert Rubin's Op-Ed piece in Tuesday's New York Times, or Treasury Secretary Tim Geithner's comments before The Wall Street Journal's CEO Council, if you think that base broadening alone will satisfy this administration or the political left.

President Obama has leverage after a brilliant, if divisive, campaign. His message: Anti-tax Republicans lost nationally. As he said in facing down House Majority Leader Eric Cantor (R-VA) during a leaders' meeting before the budget faceoff of 2011, "Elections have consequences." Were Obama to concede with his iron so hot, his constituency would feel betrayed and angry. And he will arguably have squandered an opportunity to establish a precedent. Thus, he's campaigning to box Republicans in, meeting with labor leaders and liberal groups and CEOs for the past two days.

By the time Republicans visit the White House for a photo-op on Friday, Obama will have shaped the battle lines. He's backed by Democrats urging nothing less than allowing the upper-income Bush tax cuts to lapse, and he will look for double the amount of new revenue Boehner was willing to sell to his caucus during the golf course negotiations last year.

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