This will be shorter than usual, something I’m sure pleases more than a few of you. I’m traveling this week, in Asheville, NC Monday and Tuesday meeting with some clients and future clients and taking a much needed break in Hilton Head the rest of the week. I’m playing Harbour Town next Sunday so the odds of getting anything from me next week are pretty slim but if something dramatic happens I’ll get something done at the 19th hole.
The House Republicans and President Obama were unable to reach a deal before the beginning of the new fiscal year so the federal government shut down last week. Well, shut down may be a bit of an exaggeration since most of it seems to be functioning fairly normally or at least as normal as government ever does. Roughly 85% of government services are still open for business. While the effect on the people who need or work for those parts shut down may be severe the overall impact on the economy will probably be fairly benign. Of greater concern is the coming debt ceiling, which if breached, could cause a bigger dislocation. How much is a matter of debate though. It appears to me that tax revenue amounts to about 80% of total spending so the difference may not be as great as some think. Whatever the case, despite the rhetoric of President Obama and Treasury Secretary Lew, the US government will not default on its debts.
Both sides of the budget debate have carved out untenable positions. The Republicans are insisting on defunding or delaying Obamacare and no matter what comes to pass, that is not going to happen. Frankly, I think they should let it be implemented and see where the chips fall. There is no argument – or at least there shouldn’t be – that the US healthcare system needs reform, but Obamacare is poorly designed and is likely to produce enough complaints to make even President Obama want to make some changes a few years out. Its a start on healthcare reform not an end. Republicans need to get over it and move on to more substantive issues.
As for President Obama, his position is that he won’t negotiate, period. That’s not an option either and sounds every bit as childish as the Republican position. There should be a debate about the budget and how the government taxes, spends and regulates. Maybe it has escaped notice in DC since things seem to be booming there, but what we’re doing now – and what we’ve been doing for at least the last two administrations – isn’t working. One need look no further than the fact that the Federal Reserve is on at least the 4th iteration of Quantitative Easing to understand that fiscal policy isn’t getting the job done. The only reason the Fed feels the need to keep trying experimental policies is because the other parts of economic policy – regulatory and fiscal policies – are not producing sufficient growth. For sure there are differences of opinion between the two parties about how to fix things, but that’s exactly why the President needs to negotiate. And it isn’t like this debt ceiling snuck up on the President and Congress. They should have been having this debate and negotiation all year. As I said, childish.
As for the market reaction, it hasn’t been that severe yet and I’m not sure any movement so far has anything to do with what is going on in DC. There are plenty of other things to capture the attention of the market. Earnings season is about to get underway and growth of both revenues and earnings are unlikely to set investors hearts atwitter although the coming IPO of Twitter may. The Twitter IPO is an indication that speculation is alive and well on Wall Street and Main Street alike. The IPO biz has been hot all year and the last time I saw things this frothy was in 1999. I wonder if the doubling of Potbelly in its debut last week and the coming Twitter flotation will mark some kind of peak?
For now the trend of the market is still higher. It isn’t cheap and growth is anemic at best but so far investors keep looking past that in anticipation of better days ahead that never seem to come. If the politicians keep squabbling like spoiled children those better and happier days may never come. At some point it seems likely the market will have to adjust to that reality. QE may have had a positive impact when it was new and surprising but now that it has become the new normal its impact is waning. The Fed can’t fix what ails Washington DC and the US economy. That will only happen when one side – or hopefully both – of this childish political temper tantrum decides to act like an adult. I’m not holding my breath.
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