In a note previewing the upcoming Debt Ceiling fight, Goldman’s Alec Phillips showed this intriguing chart.
Photo: Goldman Sachs
The chart shows the volatility index in the days leading up to the Debt Ceiling and the Fiscal Cliff, and shows that other than a brief spike at the end there was never any indication of heightened volatility associated with the Fiscal Cliff.
This chart isn’t totally satisfying, because “hitting” the cliff was never going to be anywhere near as problematic as hitting the debt ceiling.
That being said, if Washington brinksmanship become the norm, and everyone gets used to these last minute surprise solutions, then it only makes sense for the market to get used to this stuff.
There’s an analogy to this that is very interesting, which is the way the economy becomes immune to high oil prices, such that $90 oil today doesn’t have the same drag on the economy as it did the first time oil hit $90. The economy adapts. If brinksmanship becomes the norm, don’t expect the market to behave each time there’s a new flareup.