Super Committee Setting Up for Epic Fail

NEW YORK (TheStreet -- With every passing day, it seems more likely that Americans won't be giving thanks at Thanksgiving for a job well done by the Super Committee.

While some believe the cost of failure is too high, expectations that the bipartisan group will be unsuccessful are growing. The group of six Republicans and six Democrats were tasked with finding over a trillion dollars in spending cuts -- something Congress and the White House were unable to achieve. If the panel isn't successful in meeting the deadline, then the nuclear option goes into effect, which is $1.2 trillion in automatic cuts that cut across all lines. The across-the-board cuts would tap into national security and domestic spending, but entitlement programs would be spared. Tom Gallagher, a public policy consultant to Morgan Stanley(MS) and a senior fiscal and public policy analyst with Scowcroft Group, has four scenarios that he believes could play out.The first one is gridlock, and Gallagher believes this is the most likely outcome after three months of meetings. Without a majority, automatic cuts will come into play, and the fear of a downgrade of the U.S. credit rating rises. "In this case, there is no downgrade risk," Gallagher said. "However if you have groups fighting against the cuts, the downgrade risk rises." The next scenario and one that many feel will happen is that the group will ask for an extension. "They could ask for another six months, although this is just more kicking the can down the road," Gallagher said. Several traders at the New York Stock Exchange felt this is the most likely outcome. A delay in decision making allows the group to avoid being labeled as failures and makes it look like they are actually working towards a solution.The third scenario that Gallagher thinks could happen is that the committee comes up with a smaller deal. One that has a real savings level in the range of $400 to $800 million. In this case, he thinks the group extends current tax cuts and doesn't make big changes. In other words, just enough cuts to get everyone off the committee's back. Good enough for government work, right? The last outcome that Gallagher suggests and one that has the lowest odds of occurring is genuine long-term deficit reduction. "This is one in which real pain is inflicted," said Gallagher, i.e. a deal where cuts are made in normally untouchable areas like the military and Social Security. Remember the old adage: The best compromises are those in which both parties are unhappy with the outcome.

The latest rumors leaking out of the group relate to trimming some tax deductions, like interest payments on a second-home mortgage. These deductions are seen as benefiting wealthy Americans.

The Republicans view this as an olive branch, but at the same time they are asking to continue the Bush-era tax cuts. For now traders are saying that big money managers are sitting on the sidelines waiting for Nov. 23. They are worried the outcome will be negative and are hesistant to commit their clients' money to the market until that day has come and gone. --. >To order reprints of this article, click here: Reprints