That is why it's time to prepare for the failure of talks and a potential December-to-January market decline, until the hardships become so clear that compromise on principles may become the only way to avoid a recession. That, after all, could mean new candidates rising up to try to take the jobs of the intransigents.
To put it another way, let's call it the 10% solution. That is the approximate level of stock-market pain I think Congress can take before it will capitulate. Why 10%? It's about where the Congress agreed to pass Troubled Asset Relief Program (TARP), which is about has hated as the compromise needed to solve the cliff.
But the U.S. must first go over the cliff to feel the pain, just like we had to see the market tumble to provoke the TARP passage. That can only happen when the paychecks shrink and the layoffs begin in earnest.
OK, that's the bad news. The good news? Because I believe a December-to-January decline will breed a deal, in the words of Warren Buffett this morning, you should not make any long-term investment decisions based on the cliff. But trades and opportunistic tactics? I think you need enough cash to be able to buy a down-10% market if the cliff is breached.We are going to get plenty of "positive" deal talk, as we've got from House Speaker John Boehner (R-OH). We will also see negative deal talk, as we got this morning from Erskine Bowles, who champions a long-term solution to the U.S.'s budget issues. The important change, at least for me, is that a December resolution is now looking like a lost cause. This means that, instead of just a lack of hiring because of the uncertainty, we will see actual firings because the onerous provisions will come into play. You know what's truly ironic? When Congress agreed to create the cliff, it was meant to be so catastrophic that an agreement would have to be reached or else. It turns out that it wasn't nearly draconian enough to cause politicians to rise above politics. The outrageously bad tax increases and the spending cuts simply can't trump the belief that compromise represents the lowest form of life and a total betrayal of principles, even if it causes tremendous strife for the voters.