1/7/2013 9:15 PM ET|
Forget the cliff; beware the ceiling
For all the worry, the fiscal cliff was just a preview of the debt-ceiling ruckus ahead. Here's why that could be worse for investors -- and how to get through it.
You ain't seen nothin' yet.
The cliffhanger of a fiscal cliff deal was just a dress rehearsal for the late-January/early-February battle over raising the debt ceiling. This time it's worse -- and more worrisome for investors. This one could really move global markets -- and move them fast and hard, in the not-so-distant future. Here are three reasons why, plus a strategy for getting past it.
The crises ahead
This time the damage from missing the deadline for a deal sets in on Day One. The negative effects of not reaching a fiscal cliff deal on taxes and spending on Jan. 1 or thereabouts was never going to be immediate. In the fiscal cliff crisis, tax rates indeed would have gone up immediately, but tax payments would have increased gradually and spending cuts would have been phased in over time. The damage to the U.S. economy from a fiscal cliff failure would have been major -- perhaps enough to send the economy back into recession -- but it would have been felt only gradually. That's why economists, Wall Street pundits and politicians kept saying that it was possible to go over the cliff and still fix the problem before the economy suffered major damage. (This was the so-called bungee-cord strategy.)
That's not true of the debt-ceiling crisis. This time, the damage is likely to be big and immediate, and some of it won't be easily reversed.
This crisis is really three crises in one:
- Crisis No. 1 is the raising of the debt ceiling. If Congress doesn't raise the current $16.4 trillion debt ceiling, the Treasury can't increase net borrowing to pay the country's bills. In practice, the Treasury has ways to manage the country's debt levels so that it can pay U.S. obligations until, according to estimates from the Congressional Budget Office, mid-February. After that, the Treasury would have to decide to pay some bills and not others. You can bet it would continue to pay the interest on U.S. debt, even if it had to raid other budget lines to do so. Default on U.S. debt obligations would throw the U.S. and the rest of the world into financial market chaos.
- Crisis No. 2 hits shortly after the Treasury runs out of room to finagle. The fiscal cliff deal put off $1.2 trillion in automatic spending cuts divided equally between defense spending and domestic discretionary spending -- this is what's called the sequester -- that were set to gradually take effect after Jan. 1, according to the terms of the Budget Control Act of 2011, which ended the most recent battle over the debt ceiling. (About $100 billion in automatic cuts would go into effect in the 2013 fiscal year that ends on Sept. 30.) The Jan. 1 fiscal cliff deal postponed the cuts until March 1. So, sometime in the next six to seven weeks, Congress will have to resolve the automatic budget cuts it has failed to address in a meaningful way in the past 18 months or so. Otherwise, federal spending gets whacked by $100 billion this year -- with more cuts to come. That's certainly enough to take a bite out of first-quarter growth in gross domestic product that economists already fear could dip to a rate of just 1%.
- Crisis No. 3 comes close on the heels of Crisis No. 2. The September 2012 continuing resolution that authorized spending by the federal government expires March 27. Unable to pass an actual budget or the appropriation and spending bills that go with it, our government in Washington has been operating under a continuing resolution that authorized spending for the first half of fiscal 2013. Unlike a failure to raise the debt ceiling -- which would lead to the government paying some bills and not others -- failure to extend the continuing resolution would mean that the federal government wouldn't have authority to spend any money. Here, we're looking at something that would actually shut down the federal government.
The two sides have already begun to double-down on their rhetoric. Congressional Democrats, afraid that President Barack Obama will negotiate spending cuts on entitlements including Social Security and Medicare, are urging the president to get tough. House Minority Leader Nancy Pelosi, D-Calif., has said the president should invoke the 14th Amendment to raise the debt ceiling by presidential order. Section 4 of that amendment says, "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." Some constitutional lawyers -- along with some Congressional Democrats and some members of the Obama administration including Treasury Secretary Timothy Geithner -- have argued that this language makes the debt ceiling itself unconstitutional and gives the president the power to simply raise or ignore the debt ceiling. (So far, the White House, aware that such an assertion of power would provoke a constitutional crisis, has said it does not intend to invoke the 14th Amendment.)
On the Republican side, Senate and House leaders facing a revolt by conservative Republicans have declared any further tax increases off the table. On Sunday, Republican Senate Minority Leader Mitch McConnell of Kentucky said, "The tax issue is finished, over, completed." That will come as a surprise to a White House that is holding to its position that any spending cuts must be balanced 1-to-1 by tax increases. Such extreme positions seem to mark the beginning of negotiations in Washington these days. And the distance between these positions, even if they are rhetorical posturing, is certainly enough to make reaching any agreement a long and drawn-out affair with big potential to worry the market.
What the market fears
That potential to worry the market is what interests investors most. Here's how I'd handicap that worry.
From the fiscal cliff deal, we know that investors are inclined to assume that, against all evidence, politicians will find a compromise rather than wreck the economy or destroy the U.S. credit rating. I think in this case that means that the markets are likely to stay relatively optimistic until at least the fourth week in January.
How do I arrive at that? The next meeting of the Bank of Japan is set for Jan. 21 and 22, and the next meeting of the U.S. Federal Reserve's Federal Open Market Committee is Jan. 29 and 30. The Bank of Japan is widely expected to cave in to pressure from the newly elected Liberal Democratic government and announce a big program of bond buying that would push inflation toward a goal of 2% and weaken the yen. Investors will be looking to the Fed meeting for signs that, after the fiscal cliff deal and with the looming uncertainty of the three February crises, the bank intends to keep its $85 billion-a-month program of economic stimulus (via quantitative easing) running at full throttle.
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VIDEO ON MSN MONEY
Military spending by Nation, in ( billions )
United Kingdom $62
Saudi Arabia $48
S. Korea $30
World Total = $703 Billion United States 2012 = $711 billion
Which Nation is the Biggest threat to us, it's obvious, it's the United States.
We have an ever growing portion of our population for whom there will never be a living wage job unless fundamental changes are made. Automation and job export have hastened the process. Add to that an aging slug of baby boomers that will soon go on benefits and it boggles the mind how we can ever get through this. Politicians can be quite intelligent when taken singly but collectively they are idiots. I feel like used car salesmen are running this country. (no offense to you used car salesmen) We have been suffering from a short term mentality for too long.
We have been losing the trade war for 30 years but we keep on playing the game. We handed our industrial balls over to foreign countries where their governments manage commerce like military campaigns and we wonder why we are losing? How's that trade deficit with China going? They sell us everything we used to make and we sell them KFC. That was a great deal wasn't it.
Slavery was a terrible thing when it was happening within our borders but we seem to have no problem with it when it is occurring in some third world country. And just like the slave owners in the 18 and 19th century, people (now corporations) are getting rich from it. Problem is, there are fewer and fewer people that can buy anything these days so the system is collapsing. Since corporations aren't hiring, the government has had to step in and support the masses that used to work for a living. Take away that support and you are back to the soup lines of the 30s. Short of some great pandemic or nuclear war, we are going to have a lot more people than jobs for the forseeable future. That's what we need to address and we are already too late.
Yes Congress will drag this on until the bitter end and it's going to make the markets crazy. Then they will do what they have to do and raise the debt ceiling. Holding a gun to your own head hasn't worked since "Blazing Saddles".
It's about jobs guys. Bring our industries back home or there will be nothing to tax.
No sh*t, Sherlock.
So why do we go thru all the drama from Republicans when they know from the start.....the limit HAS to be increased, and, the American people don't like messing around with the country's credit rating, and, the Republicans will look like fools all over again if they try this?
See, the Republicans are also needed to pass a budget. Funny thing.....
So, the two sides have to agree on a budget and then pass it back to the Pres to sign. Apparently this is unknown to Republican, right-wing drones on here. So, you could say it's Republicans who haven't passed a budget in nearly 4 years.
As a former small contractor which did some work for the DOD, I found the actual waste was horendous. I literally witnessed a contract that would remodel a building and within a couple of years the building would be demolished. This goes on all the time. What I've also witnessed as observations at all levels of government the only way to limit waste is firm cuts to budgets. This leads me to conclude that a 25% cut is possible without touching any benefit, it would merely make those responsible "more responsible" limiting waste and corruption. Niether Republicrats nor Demlowcrats will have the will to "slash and burn" but instead will tell everyone they are cutting, but instead afterwards we will find out that in fact spending will continue unabated. Kinda like the "tax cliff" arrangement, now everyone is realizing the Obamlacrats and Repubicrats kept the details secret. Our nation cannot be saved, the "trough feeders" have a voracious monetary appetite for greed and plenty.
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[BRIEFING.COM] The S&P 500 ran into a wall of resistance shortly after the top of the hour and dipped back to its lows of the morning (which weren't all that low). The pullback was emblematic of today's session where there simply hasn't been much conviction.
The latter is raising a few eyebrows since there was enough good news this morning (eg., no escalation of geopolitical problems, M&A activity, ISM Index at highest level since March 2011) to power up the market, and yet ... More
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