Markets lurched from nowhere to nowhere this week, waiting for deals. Or no deals, or to see what kind.
The deal watch deflected attention from the economy, which after all is the whole point of the show. New data said a lot by saying nothing. The Philly Fed index, new unemployment, sales of existing homes, starts of new homes, home prices, mortgage applications — all flat. Neither sinking back into recession nor going anywhere.
Goldman announced lousy earnings, having retreated from trading risk. If they don’t feel like taking risk, who should? And after its IPO, silly Zillow is worth a billion bucks — no profit, no recognizable business plan, but if it’s tech, fruitcakes will buy the stock.
The markets told us what to think about pending deals. On Tuesday, when it looked as though a big US budget deal was back on, deep spending cuts and some revenue raised, stocks jumped 200 Dow points, and interest rates fell, the 10-year T-note almost breaking two months’ resistance at 2.88%. These two markets typically trade against each other, stocks-better/rates-worse. Stocks-better/rates-better… that’s big. Reflects not just market pleasure at a deal, but the right kind: curtail Treasury borrowing immediately, take the heat off rates, inflation, and the Fed.
The arguments in favor of more spending stimulus, jobs programs, infrastructure, whatever, appear to markets as creative procrastination. Time to bite the bullet.
Then, market reaction exposed this new Euro-deal. Briefly on Thursday it looked as though Europe was throwing in together, making authentic progress toward financial union, and cash came out of bond-market safety and poured into stocks.
Optimism did not survive the day. The new “plan” is hyper-complex gobbledeygook, through it all just more of the same. Cut Greek-Irish-Portugese interest rates enough to let them gasp for air every few minutes, but otherwise hold ‘em under water. Add a dangerous demand for private-sector losses, and pile on more debt. This newest can-kick may defer chaotic breakdown for a month or a year, but bet on sooner than later.
Here in the US, we have a tremendous wrestling-match under the blankets. Taking a page from the NFL book, the parties have largely shut up — a great benefit to negotiations, but frustrating to those awaiting sacrifice in the arena. Which of us will be called, sent to lions?
Mr. Obama is terrible at this. He was a disinterested Senator who disliked the process and the players. No deal of this magnitude ever gets done without the President putting his future on the line, yet Mr. Obama seems to think a deal will come from Congress, like feathers from a turkey. Mercifully, Joe Biden knows the process cold, and revels in it. John Boehner has shown more character and care than anyone knew, maybe enough to overcome the deficits among his compatriots.
A foreceful change during the week: the threat by S&P and Moody’s to cut the United States’ AAA rating even if there is a deal. If it’s not big enough, nor serious and enforceable, we go to AA and havoc. I don’t think either the President or the Congressional Tea Party want that on their resumes. There are limits to blaming the other’s intransigence, and this one helps.
The worst-possible outcome is a raised debt ceiling, no budget deal, and deferral of a disastrous deficit to an election duel next year, shotguns at ten paces, the American people in the middle. If we will not limit our borrowing, the markets will — a certain road to higher rates and a choked-off economy.
Last… passing yesterday unremarked by any major media was the 150th anniversary of the bloody collision of 60,000 Americans near Manassas Junction and Bull Run creek, the first real battle of the Civil War. As defeated Union soldiers streamed back into Washington, the reality of a long, hard war arrived with them.
Those demoralized by our temporary difficulty with self-governance, struggling with mere money, might mark yesterday’s occasion by remembering our strength in serious trial, and ability to join together and to heal.
Chart thanks as always to www.calculatedriskblog.com: