November 11, 2012
Weekly Market Outlook
By Keith Schneider
Capitol Hill has taken a cue from movie writer/director Quentin Tarantino by always including in each of his movies, a Mexican standoff. This has proven to be a successful formula for making movies but not for running the country; nonetheless, the US is having one of its very own. It is an interesting study in human behavior in that faced with annihilation or negotiation, we might actually choose the former.
For the ultimate look at this human phenomenon, look no further than the Cuban Missile Crisis, where both Fidel Castro and our very own General Curtis Lemay were pushing for all out nuclear war. Cooler heads prevailed with President Kennedy and Soviet Leader Khrushchev both backing down from the brink.
This has not always happened in history and one can look to the origins of WW1, the outcome of the markets next move and our economic destiny hinges on how this plays out. Make the wrong bet on human behavior and it will cost you dearly. If no deal is struck, automatic spending cuts, tax increases, and a reduced military budget will start this January 2. Throw in another debt downgrade and it's not a pretty picture, at least short term.
Most economists agree that going over the fiscal cliff will likely cause another deep recession. However, the longer term consequences of a smaller but forced deficit are unclear and maybe even positive. Last year's US debt downgrade resulted in rates dropping and actually reduced our borrowing costs and hence our deficit, but this is not something to count on again. Last year's illogical response of the market's debt downgrade could switch to logical this time around in a heartbeat.
One scenario is that China could decide not to rollover its $1 trillion short term holding of US Treasuries. Borrowing costs could easily triple and the reserve status of the dollar end. This of course would play out as yet another Mexican standoff as our economy employs lots of workers in China, and gainful employment for the Chinese masses is what keeps communist party leaders driving Ferraris; but you get the picture.
Neither the Republicans nor Democrats seem ready to negotiate on how to solve the fiscal crises. Our re-elected and emboldened President insisted that no new deal will be struck without an increase in taxes on those making $250,000 a year. The market slipped over 2% this week and 6% this month already as the Eurozone crises added to the woes.
My bets are that saner heads prevail and that we will not do a Thelma and Louise. We will drive up to the edge of the cliff, take a look down, and decide not to take the leap. This week's video takes a hard look at where we are, how much pain we might have to endure before the market finds some footing, and the stronger sectors where early signs of a potential rally could show up first.
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Have a Great Weekend!
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