"We have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline"
While S&P has since said that it won't view this inaction as cause for another rating downgrade of the United States, the fear was certainly there in the markets. This should really not surprise us of course. Even the most super-duper of our pathetic congress will not negotiate and make concessions, because it is indeed their political careers that matters most to them. In an election year, it is best to find ways to blame the other side for their role in making no progress, and use it to establish campaign platforms. I just finished watching an Obama press conference, and true to form, he did just that.
Alexis de Tocqueville, the 19th Century French writer who wrote about American democracy would likely have a few comments to make about this congressional situation were he to be around today. While he has been dead for over 150 years, some of his comments about American politics (and bare in mind Tocqueville was a great admirer of America) seem like they could be made today.
Here are a few quotes I found from goodreads.com, that I find enjoyable:
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"I do not know if the people of the United States would vote for
superior men if they ran for office, but there can be no doubt that
such men do not run."
“There are many men of principle in both parties in America, but there is no party of principle.”
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”
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I have chosen to write about this today for a few reasons. First, I find it fascinating that through all the time and progression of our country, such comments could still be so relevant. Tocqueville wrote when slavery was still legal in the U.S., just to give a sense of how young of a nation the U.S. was when he wrote. Secondly, I find the fact that his quotes are so pertinent to be an indication of how hard it will be for us to break our habits. We would all love to believe that our congress will find ways to make cuts, and that we will find a way out of all of the challenges we face. And one day we will, but it won't come without the proper amount of pain that causes us to break the ways that have gotten us to this point. Our deficit issues are borne largely out of the relationship self interested voters and self interested politicians have for short term gratification. As bills come due, eventually the pain of reality will set in. If Alexis de Tocqueville could make observations about our government that ring so true today, I think it is fair to say that old habits won't be dying easy.
When I wrote my last post, I said that we would likely see a near term sell off because of Fitch's negative commentary on Eurozone debt. We have sold off, and now, near 1185 on the S&P sit in the middle of the range high to low from the years highs to lows. Short term bounce? Perhaps, perhaps not. But the outlook has to remain negative because of what we are seeing in governments across the globe. There is an inability to act in concert to try to take on the problems of the world. The failed experiment that is the European Union of course suffers from individual nations' economic/cultural interests differing while sharing a single currency that cannot be all things to all participants. America has no such issue (there are differences between states, but they are not nearly the differences Eurozone countries have) and still it seems cannot act swiftly to help stem the crisis before us. Like in 2008, we will find that until we are pushed to the brink and forced (a Lehman like event, even if it takes on a different form) to deal with our debt woes, we will go on voting in the same duds we call our leaders, and they will continue to make unrealistic and unrealizable promises.
Does it strike you as funny that on a day like this where the US news is so negative that investors flee to buying US treasuries? If that isn't an indication of how cockamamie things are I am not sure what is. But this is not an indication of market insanity, or irrationality. Comparably, U.S. treasuries probably do deserve to be a safe haven. It is rather a reminder of how dire our situation is, and that soon, barring a miracle, there will not be any place to hide. The founding fathers, contrary to widespread public thinking, purposely chose to create the system of American government to make progress hard to come by. This, understandably, was the safeguard against tyranny. Now however, we are in a tough spot, because we need more progress from our government, but history tells us that the pain will come before the jubilation.
The counter-argument to this pain before gain scenario I have laid out is that of stimulus. What if tomorrow the US and Europe came out with stimulus plans to boost all economies. Even if they were to be unsustainable, the markets, particularly the equity markets should have a field day. That is the risk of being in cash (and hence missing the move up). As the New York Lotto slogan used to go; "Hey, you never know". But bear in mind, that with national debt reduction requirements looming and the inability to reinvigorate the economy through lowering interest rates (we're past that) the number of tools that we have for stimulus are ever-more limited. What policy-maker, no matter how short sighted would use up the tools they have at their disposal now and not save them for a slightly rainier day? Perhaps Tim Geithner, but thankfully, no one listens to him anyway.
I am more than happy to miss an end of year rally of 10% to the upside to protect what money i have as all of the charts begin to break down. Lots can change, and perhaps with the prospect of sideline money coming to the table come January 1st will derail this thesis assuming we are able to coast for a while. For now however, it is far more prudent to stay short, or just out. As for gold? Everything I can see going on as far as money printing in Europe should be bullish for gold. If the dollar continues to be a safe-haven however, its purchasing power makes gold less attractive. I think the time will come when gold makes new highs into the 2000s and perhaps beyond. For now however, it is far too correlated with the stock market, and I would not become bullish unless my outlook for stocks is wrong, or we begin to see divergence between the way gold and stocks trade.
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