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Fiscal Cliff Talks at Stalemate But Markets Still Betting on a Deal

Aaron Task
·Editor in Chief

Listening to the Sunday morning talk shows this weekend, it appears negotiations over a deal to avoid the fiscal cliff are breaking down. Watching the financial markets this morning and you'll come away with a very different conclusion.

The Dow (DJI) was down a hair in recent trading -- off its early highs -- while the S&P 500 (GSPC) and Nasdaq (IXIC) were marginally higher. In other words, this isn't a market acting like it fears an imminent breakdown of the talks — or the cliff itself, for that matter.

Before looking ahead, a quick recap of the political chatter:

Speaking on Fox News this weekend, House Speaker John Boehner said the talks have gone "nowhere," echoing his comments Friday when he said: "There's a stalemate, let's not kid ourselves."

Speaking for the president (literally and figuratively), Treasury Secretary Tim Geithner declared that Republicans will ultimately give in on their opposition to raising taxes.

"The only thing that stands in the way of a deal right now is if a group of Republican members decide they're going to block a deal because they want to extend tax cuts that we can't afford for the wealthiest two percent of Americans," Geithner said on Meet the Press.

At the end of the day, most Wall Street observers and many Washington pundits believe a deal will get done, if not before Jan. 1 then shortly thereafter.

What's happening now is "a largely choreographed drama whose precise end may not be known, but is likely to include a sizeable tax hike on the order of a trillion dollars, spending cuts that get somewhere close to that number and a pledge to come back next year and try really, really hard to do fundamental tax and entitlement reform," Politico's Ben White said on Friday.

Related: Politico's Ben White: Get Ready for a Market Rally Because a Fiscal Cliff Deal Is Coming

As Secretary Geithner and other Democrats declared on the Sunday talk shows, the onus is now on the Republicans to come up with a counter offer or agree to the president's opening salvo, which they are loathe to do.

Separately on Meet the Press, Sen. Claire McCaskill (D-MO) described what seems to be a very likely outcome if no deal is reached before Jan. 1. "We would come back in January, first thing…and pass a tax cut for everybody under $250,000 [in income]," she said. "What, are the Republicans going to vote 'no' on that? Of course, they're going to [agree]-- so they are going to get stuck with a raising of the rates of the top two percent either in a very painful way or in a way that we can all suffer a little bit, address all three legs of the stool--entitlements, cuts, and revenues--in a way that makes sense."

Perhaps this really is all just "kabuki theater," as my colleague Henry Blodget suggests, and the president is giving Republicans a chance to look as if they're put up a "good fight" before ultimately conceding.

The good news is that the fiscal cliff isn't really a "cliff" at all. The spending cuts don't hit at all once and the tax hikes could be rolled back, or forestalled by Congress at (almost) any time.

The bad news is that the consensus has cemented around the idea that cooler heads will prevail and Republicans have "no choice" but to concede to most of what President Obama is proposing, which is a $1.6 trillion tax hike, $400 billion in savings from entitlement reforms, $50 billion in infrastructure spending and new limits on Congress' power over the debt ceiling.

As I wrote last week, given the recent history of votes on TARP in 2008 and the debt ceiling in 2011, I'm hard-pressed to see why people think there's going to be a sudden outbreak of rationality and harmony in Washington.

On a related programming note: Grover Norquist, founder of Americans for Tax Reform, is scheduled to be a guest on The Daily Ticker on Wednesday.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com