If you watch coverage of the Fiscal Cliff, you might think that on January 1, the economy is going to go full on Thelma & Louise and crash to its fiery death into a gigantic canyon if there’s no deal. Every network is running countdown clocks to the moment the US meets its demise. 38 days! 37 days! 36…
But there are two problems with this way of thinking about it. One is that the amount of intransigence in Washington is nothing like it was in the Summer of 2011, when an emboldened Tea Party took Obama to the mat over the debt ceiling. The other problem is that there’s time to get into January without a deal, provided that Washington agrees to something fairly early.
Who gets that? The market does.
Scotty Barber (the brilliant chart maker who used to work at Reuters) posted this great chart at his new perch at BlackRock comparing the VIX (the volatility index) vs. a “Policy Uncertainty” index, which tries to gauge the amount of uncertainty based on certain headlines.
Unlike virtually every other uncertainty spike since 2000, there’s no VIX spike along with a spike in uncertainty.
Now you can dispute the validity of an uncertainty index, but the fact that it corresponds fairly well to the VIX is compelling. And the fact that the VIX isn’t worried this time speaks to the fact that perhaps the coverage is overhyped.
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