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US debt debate: Winston Churchill gives us hope!
by Peter Switzer
The debt ceiling debate in Washington created another disappointing finish on Wall Street after the Dow was actually up. The gain was despite no measurable improvement in the negotiations between Republicans and Democrats but the sellers came in late.
But I do remain hopeful that good sense will prevail and I quote Winston Churchill to shore up my flagging confidence: “America will always do the right thing, but only after exhausting all the other possibilities.”
Really this head-to-head battle on Capitol Hill is like reporting on a game of tennis between Roger Federer and Rafael Nadal a couple of years ago, when those two guys’ abilities were so close and it made it hard to guess who was going to win.
The only problem is this is far more serious and far more important.
Credit Suisse has made some premature calculations, which says if the US defaults there would be a five per cent fall in American GDP! But it gets worse with stocks tipped to slump – wait for it – 30 per cent. So the second-raters in Congress are playing with fire and they really think we care about their stupid posturing.
The House votes today on the Republicans’ plan, which should be rejected in the Senate. So, this drama could go right down to the wire on 2 August.
Against this was better-than-expected economic news and US companies reporting better-than-expected results.
The Dow lost 62.4 points, or 0.51 per cent, to 12,240.1, while the S&P 500 gave up 4.2 points, or 0.32 per cent, to 1300.7. And not surprisingly, the VIX or fear index is up over 23 but it is still not in panic territory – just the really, really nervous region.
To keep the faith that if this debt debate can be resolved, stocks have a good outlook for the second half of 2011, US jobless claims came much better than expected but the big test is next Friday when the monthly jobs report comes out. The last one was a shocker and so anxiety is building.
Also, pending sales of existing homes jumped, beating expectations, and so it is not all bad news.
One final point which explains the predicament we are in was made by Laszlo Birinyi. CNBC describes him as the legendary trader at Salomon Brothers from the 1970s, who looked at all of the spook factors out there right now.
“Many of them are, frankly, beyond our capabilities and competence,” he said.
Look at his list: the debt debate, the Euro debt crisis, the end of QE2, a potential ‘hard landing’ in China, troubles with municipal bond financing and a still stumbling US housing market.
But most of all I liked this take made on the comparative overall situation by Don Rissmiller, chief economist for Strategas research and former economist at the Federal Reserve Bank of New York.
“While we do not appear to be making the sharp policy mistakes of the 1930s, we do appear to have some longer-term drags – the potential for debt downgrades and the need to ‘write the rules’ still on financial regulation and the Healthcare bill,” he told CNBC.
So, as for me, I am nervous about dealing with the debt ceiling in the short-term but remain positive towards stocks.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Published on: Friday, July 29, 2011
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