Will There be a Grand Compromise II?
Up until yesterday afternoon, I had been pleasantly surprised as to how well the major indices had held up under the incessantly negative headlines and all the talk about default, deficits, downgrades, and doom. However, as expected, the bears finally found their mojo Wednesday as the dithering in Washington gave even those confident in the idea that the politicians wouldn’t muck this up a reason for concern. So, with no buyers and lots of reason to be fearful, the glass-is-half-empty crowd had a field day.
Four days ago, everybody in the game was confident that a deal would get done. I also found myself in this camp but found it strange that I had so much company. Whereas the hedgies had been playing the sovereign debt crisis in Europe for everything it was worth from the short side, they did not appear to be taking a similar stance in the debt/deficit debate. In short, I would have expected to see the fast-money types capitalizing on all the hype and fear mongering in the press.
As the debate unfolded, I expected to see the market get slammed at some point. I expected to see the S&P make yet another trip through the trading range. I assumed that with the deadline-that-really-isn’t-a-deadline more than a week away, fear would get the best of folks at some point. And while the timing of my assumption was off by a few days, I wasn’t terribly surprised to see the sell programs finally hit hard yesterday.
As the politicians like to say, “Never let a good crisis go to waste.” And that appears to be exactly what is transpiring at this point in time. The only problem is that everybody expects that Boehner’s plan (whichever version is presented) won’t pass the Senate and that Reid’s plan won’t pass the House. Thus, the way the game is expected to play out is we will see each chamber pass their respective bills, and then both will fail when they reach the next chamber. At that point, the President is expected to call everybody back to the negotiating table for a “grand compromise II.” And if everything goes according to plan laid out by those who follow politics for a living, this is expected to produce a deal by Sunday, or Monday — or not.
It’s the last part that has banks and corporations across the country hoarding cash and preparing for the worst. It seems that four days into the debate the expectations have changed. Whereas everyone expected that the politicians would get ‘er done early on, they are now fearful that the gun will indeed accidentally go off as this game of brinkmanship continues and each side refuses to yield.
I understand that in America, our debates are carried out in public and that in the process, things get messy. I understand that this debt/deficit/default debate is viewed as the key to the 2012 elections. However, I’m not sure the politicians understand how critical this debate is to the future of the economy. I’m of the mind that the economy remains fragile and that another shock such as a default or debt downgrade might throw us right back into the soup. And the bottom line is that if this happens, we might be looking at a Japanese-style recovery going forward.
So, given that I am a card-carrying member of the glass-is-always-at-least-half-full club, I still expect to see a deal get done at the 11th hour (or later). However, what concerns me is that the deal that everyone in D.C. can agree on won’t meet “the hurdle” of cost cutting that the rating agencies (specifically S&P) are looking for. Thus, I fully expect that somebody in Washington will bring this up at some point. Until then, I’ve got my fingers crossed.
Turning to this morning… As if the debt/deficit/default debate in the U.S. wasn’t enough, European debt contagion fears are back in the spotlight today as an Italian bond auction didn’t exactly go according to plan. Now factor in the ongoing mess in the U.S., earnings, and some weak economic numbers and voila, futures are pointing to a mixed open at the moment.
On the Economic front… Initial Claims for Unemployment Insurance for the week ending 7/23 fell by 24,000 to 398K. This was the first time in 16 weeks that claims were below the closely watched 400K level. The report was below the consensus estimate for 421K and last week’s total of 422K. Continuing Claims for the week ending 7/16 came in at 3.703M vs. 3.696M and last week’s 3.720M.
David Moenning
Editor: The Daily Decision
