Idiocy in DC

I don’t even want to begin to count the hours wasted in DC on the shutdown and debt ceiling let alone what it did to innocent Americans, our economy and our focus as a nation. Yet our elected officials are celebrating like they won the World Series?!?! What an embarrassing mess.

White House staffers were quoted as saying they were “winning”. Speaker Boehner said they “fought the good fight”. I am glad our elected officials in DC treated this debacle as either a game or a war. How ridiculous that these are people who are supposed to be representing the electorate and serve OUR best interests, not theirs.

And in the end, all the country got was a 3-4 month reprieve before this starts again. The GOP better look long and hard before attempting this nonsense without a real plan. I said this when the government first shutdown and now I am even more convinced. If the republicans had simply raised the debt ceiling through the next election without conditions, they could have dug their little heels in on almost any of the other issues without being demonized. Obama could no longer be Chicken Little with his scare tactics and maybe, just maybe, the two parties could have reached some kind of Reagan/O’Neill compromise.

As we approach the next joke of a deadline, it will be interesting to see how the GOP position themselves since they lost what little credibility they had left when they caved in and received nothing in return this week.

I have written about scenarios like this before regarding the markets and except for the time I was wrong in 2011, it usually pays to ignore the nonsense in DC and the chest puffing on TV. In this instance as with the fiscal cliff and sequestration, I felt very strongly that the markets would ignore the news. One of the confirming reasons was because all of the media interviews I have done focused solely on the negative outcome, even going so far as to doubt the bullish case. That’s unusual. 

Stocks and bonds continue to act very well and there should much more to come this year and into next. I have been salivating to buy treasury and quality corporate bonds and I think the bottom has been hammered in for the rest of 2013. For full disclosure we are long and have been long high yield bonds for some time.

Boehner Listened… Kinda, Sorta

John Boehner didn’t call me (he should have) and I doubt he reads my comments (he should), but at least the republicans figured out that their tactics were not working. They may not have unilaterally raised the debt ceiling long-term, but if the reports are accurate, they are going to offer a short-term raise in exchange for negotiations with the democrats on a variety of fiscal issues.

As you would imagine, the markets responded favorably although Europe led the way as the ECB and Bank of China announced the establishment of bilateral swap lines for the two currencies while we were all asleep.

I have been writing about the “whoosh” day to clean up this neat and orderly little pullback and after Wednesday’s intra-day recovery, it looks like we have at least a short-term rally on our hands. The super bullish case would have stocks going straight to all time highs from here which would really squeeze the bears who are not only positioned negatively for the nonsense in DC but also for a poor earnings season. The moderate case has the market rallying for a few days to a week and then revisiting Wednesday’s low by month end. From there, the year-end rally begins. The bearish case has this little rally ending shortly and then knifing through the recent lows and an elevator shaft style decline.

It’s too early to say which path the market will follow, but I am leaning towards the moderate one.

The Administration Who Cried Wolf

With the exception of those directly affected and impacted by the government shutdown, it doesn’t seem like the public really cares. If it wasn’t constantly shoved down our throats by the media, I am not sure most people would even know. From the polls I have seen, the public is not in favor of closing the government as a strategy to forestall ObamaCare, but at the same time, they are also not in favor of ObamaCare itself. So conclude what you may.

Over the years, I think we have learned that with any public and serious negotiation, the two sides never really compromise or present reasonable offers until the second before midnight. This happens almost all of the time with the airlines and their unions. It happens every time with anything in Congress. In sports, sadly, we often see the two sides dig their heels in so much that a lockout or strike ensues.

My opinion today remains the same as it was before this began. Once the shutdown got passed a day or two, it was going to continue at least until the debt ceiling was hit in mid October. The incentive to open government now only to have the debt ceiling in a few days is very small. And speaking of the debt ceiling, the administration has said that October 17 is the hard date, the line in the sand. No matter which side of the aisle you sit, it’s generally accepted that the ceiling absolutely must be raised.

But it’s a long way between now and that compromise, or is it?

Yesterday, the Treasury Department pulled out all stops in screaming “FIRE” in a crowded theatre.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth… Credit markets could freeze,the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

As I recall, we heard the same garbage regarding the “dreaded” fiscal cliff late last year with recession and interest rates spiking and markets collapsing. I laughed each and every time DC spoke (actually called it a hoax) and used it to our clients’ advantage in Q4 2012 and especially Q1 2013. Only a few months later we were bombarded with sequestration, automatic budget cuts across  the board resulting from a bipartisan compromise reached in August 2011. If you recall, these cuts were going to send our economy spiraling into recession with spiking interest rates and collapsing financial markets.

By my count, the economy is the same mediocre, post crisis economy it was six months ago or maybe even a bit stronger. The stock market is up more than 10% and while rates have risen substantially, I think it’s fair to say that the reasoning behind it is the Fed taper and not anything having to do with sequestration.

So forgive me if I completely and utterly dismiss the scare tactics and hyperbole from the U.S. Treasury. Talk about the administration who cried wolf! The problem is that one day there will really be a crisis just ahead of us and after all this nonsense, it will be largely ignored.

So how do I think this will all end and what will the impact be on the financial markets? 

Putting myself in John Boehner’s and the GOP’s shoes, they are being viewed as the culprit so far with the President carrying the message about the debt ceiling and Armageddon. If I am Boehner, I would send a bill to the House floor raising the debt limit immediately without any strings attached. It would easily pass both chambers without much debate. Then I would dig my heels in on the budget and stop trying to repeal ObamaCare until the GOP has the majority of the Senate. That takes the President’s disaster scenario off the table and changes the message.

The President’s best path is to stay the course and tone down the rhetoric a bit. I would keep painting the GOP as obstructionists and harping on the fact that ObamaCare is a law that was upheld by the Supreme Court. A law that needs some tweaking but only after we get by these two crisis’. He should offer specific concessions on entitlement spending and tax reform to try and fracture the republicans into a deal.

In the end, we are likely to see what we have seen for several years, a last minute deal that raises the debt ceiling and funds the government for 3-6 months. Sad and pathetic, but true.

Political Posturing Time

The government may be closed but the markets are open for business and apparently not too concerned about the shutdown. This week stocks are down less than 1% and trade as if a solution is not too far off. That’s not how I see it, but what do I know?!?! My thoughts were and remain that if we saw a shutdown for more than a day, it would be a lengthy one that would bleed into the debt ceiling deadline on or about October 17. That’s not a good thing because those geniuses in DC might just be stupid enough to play chicken with the debt ceiling.

Let’s face it. We all know, dems and repubs, that the debt ceiling is going to be raised. Period. If the market was collapsing like we saw in the fall of 2008 with the TARP bill, I guarantee you the geniuses would be working 24/7 on a compromise. But the markets are not the least bit concerned, yet. Let’s hope that DC gets their act together on a budget solution well before a debt ceiling crisis.

It seemed like yesterday that we discussed raising the debt limit. Wait, it was yesterday and last week, last month, last quarter and last year. In fact, it’s been a never ending saga for decades. The party in power sells fear and disaster while their opponents balk and talk about fiscal responsibility, etc. Thanks to the internet, we are able to easily find the hypocrits.

President Obama says he will not negotiate with the debt ceiling. It must be increased no matter what. I agree 100% with the president on this topic, but in 2006, then Senator Obama voted against raising the debt saying,

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

Senate Leader Harry Reid, a huge proponent of raising the debt limit right now, was quoted in 2006 as saying,

“If my Republican friends believe that increasing our debt by almost $800  billion today and more than $3 trillion over the last five years is the right  thing to do, they should be upfront about it. They should explain why they think  more debt is good for the economy.

How can the Republican majority in this Congress  explain to their constituents that trillions of dollars in new debt is good for  our economy? How can they explain that they think it’s fair to force our  children, our grandchildren, our great grandchildren to finance this debt  through higher taxes. That’s what it will have to be. Why is it right to  increase our nation’s dependence on foreign creditors?

They should explain this. Maybe they can convince  the public they’re right. I doubt it. Because most Americans know that  increasing debt is the last thing we should be doing. After all, I repeat, the  Baby Boomers are about to retire. Under the  circumstances, any credible economist would tell you we should be reducing debt,  not increasing it. Democrats won’t be making argument to supper this  legalization, which will weaken our country. Weaken our county.”

I know I am picking on the democratic leadership now, but the GOP did the same thing in 2006, supporting raising the debt limit then but not now. Chuck Grassley was a big flip flopper and I know there are many others. The bottom line is that the party in power cries wolf and the opposition tries to exact a pound of flesh although it seems to have gotten worse over the years.