Exactly one year ago yesterday, I penned a column with the headline “Don’t Panic: The U.S. Credit Downgrade Changes Nothing.” I got a lot of angry emails as the article went out in syndication, and commenters called me “a completely delusional ass,” among other things.
But the premise of the article proved to be quite true.
- I said it wouldn’t spur Washington to more action after the gridlock of the debt ceiling nonsense.
- I said it didn’t change the makeup of the markets significantly.
- I said it wouldn’t challenge the “safe haven” status of U.S. Treasury securities.
Disappointingly, all that has come to pass.
So where are we now? Unfortunately, in very much the same boat we were in August 2011. In fact, we might be in an even worse one.
In Washington, a Bigger ‘Fiscal Cliff’
The debt debate is reaching a fever pitch with a painful deadline looming. This time we are having a similar debate, on a much bigger scale. The so-called “Fiscal Cliff” of Jan. 1, 2013, is the ugly marriage of automatic tax increases and spending cuts that could cut an estimated $500 billion out of the economy in 2013 if Congress doesn’t act.
Click to EnlargeThe expiration of the Bush-era tax cuts across the board, for middle-class families and the wealthy alike, go off the books at the end of this year unless Democrats and Republicans can compromise. Dems refuse to allow the wealthiest to maintain their tax cuts at a time when debt levels are high and income inequality remains a hot-button issue (see the accompanying graphic from Mother Jones.) The GOP refuses to tax so-called “job creators” at the top, even though a heck of a lot of research has disproven the idea of trickling down wealth from the top. So expect fireworks and inaction on that front.
Concurrently, the debt ceiling “compromise” kicked the can down the road on actual budget decisions and sipulated across-the-board cuts of $1.2 trillion in both defense and non-defense programs starting in 2013. So in addition to agreeing on taxes, Congress has to agree on what spending to cut and what to keep.
Adding to the pressure is that without at least a temporary spending deal to keep the federal government running, we face a shutdown of the federal government for the first half of the next fiscal year — which begins in October, right before the election. The lazy and spineless politicians in Washington recessed for the rest of August, so that leaves a tight window of just a few weeks to get a deal done when they return in September.
Makes the debt ceiling look downright unimportant by contrast.
In the Markets, an Absurd Rally
Did you know the S&P 500 is up 16% in the last 12 months since the debt ceiling debacle? Did you know that many mega-stocks have outperformed even that gain, including a 66% run for Apple (NASDAQ:AAPL), a 46% run for Wal-Mart (NYSE:WMT) and a 27% run for General Electric (NYSE:GE)?
The markets are not hurting, my friends.
The irony is that unemployment continues to stay a persistent problem in America, China has showed increased signs of a slowdown, Europe is in the midst of deep recession and a debt meltdown … but stocks keep climbing higher.
So high that if the S&P 500 breaks the all-important 1,423 mark, it will have reached its highest level since spring 2008!
So much for a meltdown in capital markets after the debt-ceiling debate.
In Treasuries, Rabid Demand
Right now, interest rates are at amazingly depressed levels. The 10-year Treasury note popped to 2.59% immediately after the debt-ceiling snafu … but fell like a rock to as low as 1.38% just weeks ago! That’s almost half the levels during the “crisis.”
Why? Well, because there aren’t many alternatives. Volatility in the stock market has folks abandoning equities (despite the aforementioned rally for the S&P, I might add).
Low Federal Reserve rates have gutted CDs. Right now, the best five-year jumbo CD ($100,000 minimum) is an ugly 1.9%, according to Bankrate.com — much lower than the roughly 2.6% annual clip of inflation, and hardly a liquid option for investors who need their money. And then there’s the stuff outside the U.S., like eurozone debt. Not very attractive alternatives.