Taking A Step Back To Look At The Forest

The game of politics goes on (and on, and on).

It's not a fun process to watch, but this is how the U.S. system works.

As the saying goes: "If you saw how sausage is made you would never eat it again".

Stepping back a bit, I would offer these thoughts.

The modern U.S. debt ceiling was created by legislation passed in 1939 and 1941. If press reports are to be believed, the debt ceiling has been raised over 100 times since 1960. Since 1979 the U.S. House and Senate did not even have to debate this issue because, by House rule, the debt ceiling was automatically raised whenever the House passed a budget. Also note that a large portion of the debt or liabilities of the U.S. government are excluded from the calculations such as the guarantees of "Fannie Mae" and Freddie Mac". Also excluded from the calculation are all the unfunded liabilities for Medicare, Medicaid and Social Security.

For reference here is a paragraph from Wikipedia:

The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have to be set aside during 2009 such that the principal and interest would pay for the unfunded commitments through 2084. Approximately $7.7 trillion relates to Social Security, while $38.2 trillion relates to Medicare and Medicaid. In other words, health care programs are nearly five times as serious a funding challenge as Social Security. Adding this to the national debt and other federal commitments brings the total obligations to nearly $62 trillion. However, these amounts are excluded from the national debt computation.

I believe that from a "Big Picture" point of view it is a large positive that a serious debate regarding the debt ceiling (and hence the level of U.S. federal government spending) is finally taking place.

In my opinion, there will be positive conclusion reached regarding the current dispute. It may just get even uglier before we reach that point.

Now let's look at the markets and how they are reacting.

It was widely reported in the media that if a deal was not reached then gold would soar, interest rates would rise (causing a $100 billion dollar increase in the United States' interest costs: more on this falsehood later) and the equity markets would collapse.

While the markets are dropping there has been no movement which comes close to resembling the plunge following the failure of the first TARP vote in 2008.

As far as gold is concerned, it has move higher, but in the past 2 - 3 weeks it has risen only about 5%. Not the type of move one would expect if a major catastrophe was about to occur.

And interest rates on the U.S. 10-year bond has actually fallen rather significantly from the nearly 3.2% yield they sported on the 1st of July.

Oh, and in total, the S&P 500 is now down all of -3.9% from its 7/22/11 recovery peak. Measured from the July 7th close, which was the high point of the recovery from the June 16th correction low, the total S&P drop is -4.5%. And, just to really beat a dead horse, the plunge from the Bull Market peak reached on April 29th is a not-so mind numbing -5.2%.

To my thinking, that is not a terrible collapse, despite all the talk on TV about how the current situation resembles the September, 2008 market and political environment.

Everybody just calm down, please.

The misinformation and the outright hyperbole are amazing. Former Speaker of the House Nancy Pelosi has said basically that, regarding the debt ceiling debate, the democrats were trying to save the planet and allowing the Boehner plan to pass would mean "the end of life as we know it". Really?

And then there's the women I heard (on Bloomberg I believe, but possibly Fox News) who informed viewers that a default and downgrade would mean a $100 billion increase to the U.S. interest cost. Let's do some rough, big round number, math. The total U.S. debt is about $14 trillion. A $100 billion increase would imply a rate increase of about 0.7%. But that math assumes that the rate would immediately go up on ALL the U.S. debt. It won't. Any increased rate would only affect the newly issued debt. Since a large portion of the debt doesn't mature for years, the interest that the U.S. must pay on those bonds would not change one bit.

So all the "casual" viewers are left with a completely false impression.

With apologies to "X-Files": The Truth is Out There, It's Just hard to Find.

Sorry for rambling put I had to vent.

It seems to me that we are now in a self-reinforcing environment in which the news media continue to run with a good story and in which some of the "players" gradually keep "selling" the market as they all get wrapped up in the hype and fear.

I believe it is a completely phony crisis which will be quickly forgotten once a deal is done. And a deal will get done.

In my opinion (and I have been wrong in the past) we will be talking about picnics, outdoor bar-b-ques, and the "end-of-summer" by the time we reach Labor Day. The current "crisis" will be a distant memory.

There are other truly serious issues to be concerned about and we must, as traders, remain agile. We must, I believe, shorten our time frames and accept that for now at least "buy-and-hold" is not the way to gains.

Now, I'm heading out for a walk in the sun.

Have a good one...

Curt B.
Options Manager: Daily Decision-PRO

  S&P 500 - Last 12 Month

 

 

On August 1, 2011 TSP’s name will change to StateoftheMarkets.com. To ensure that you receive all of the email alerts you are signed up for, be sure to add the following email addresses to your “safe senders” list:

• Reports@StateoftheMarkets.com
  
• ServiceTeam@StateoftheMarkets.com

Remember, you are in control your email alerts! You can receive alerts for up to 25 free research report alerts!