Home > Uncategorized > 2013/10/03: Commentary: Got that old ‘2011’ feeling back… and not just us!!

2013/10/03: Commentary: Got that old ‘2011’ feeling back… and not just us!!

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COMMENTARY: Thursday, October 3, 2013.

 CNBC-OBAMAharwoodINTVW-131002Crisis? What US government funding crisis?

Uh-Oh… even the Prez is allowing this one ain’t good!! We don’t agree with a lot of what the President has put in place (in fact we disagree with most of it.) Yet he was right to caution that markets are likely being too sanguine in the face of these unyielding positions on both sides.

You’d think from the way the markets are behaving there is no crisis looming in the US. This could be a major bit of cognitive dissonance brewing for the investor class (including more than a few ostensibly well-informed fund managers.) What we are witnessing is a short term disconnect that most folks expect will be readily corrected, yet which might carry more dire implications even across the short term.

While not wanting to play Cassandra, this all feels a lot more like July 2011 Redux than anything seen in any of the mini-crises since then.

And one of the best, balanced assessments of the current state of play on the non-negotiation between the Republicans and the Democrats in the administration and Senate (a unified entity) comes from one of our favorite analysts. John Authers summed it up as a serious bout of “political stupidity” on both sides.

His view of political and market calculus is worth a read. It is an excellent, concise summary view in The deadlock discount: putting a price on political stupidity from yesterday’s Financial Times. He feels there is an abiding sense “…this shutdown will play out politically like the last one.” Which is to say the Republicans will stand down and take their lumps through enhanced standing of the previously damaged President Obama. Yet his summation also more ominously notes “…there remains a non-negligible risk of something worse in the near future, and that has not yet been priced in.”    

And therein lies the rub! While many are looking around and hoping or presuming ‘failure is not an option’ when it comes to the looming (and far more critical) Debt Ceiling negotiation, that is exactly what transpired back in summer 2011. And there is no comfort to be taken from the number or frequency of ‘meetings’, such as the one President Obama held yesterday afternoon.

It is only a more constructive result that makes a difference, not just summoning folks to sit in a room where both sides have previewed their positions as being intractable. That seems to be the way things are going at present. And that’s why Mr. Obama was right to caution that markets are likely being too sanguine in the face of these unyielding positions on both sides. And we will grant the Democrats that the way Republicans have handled this affair is appalling on a whole series of levels… and self-destructive as well.

We have already reviewed much of what is wrong and ultimately very counterproductive in the Republican approach to this matter and in general in Tuesday’s Commentary. Yet to that we can now briefly add the following. In addition to Independent voters (72% of those polled were against a shutdown to force any change in Obamacare), the Republicans have now turned off their natural allies in big business and Wall Street.

The Tea Party folks have a lot to commend them and their views, yet they cannot fund major national campaigns like the major contributors. Especially if the major contributors have a strong sense you’re going to weaken at the polls, they are less likely to write the big checks. So a goodly portion of the ‘swing’ factor in the body politic are likely to feel the Dems are a lesser of two (intrinsically less than attractive) evils.

Why It’s Not 2011

And we want to be especially clear on one last highly significant point: this is NOT August 2011 waiting to happen all over again for one very good reason related to the broader global economic and financial context. While the failure to raise the US government Debt Ceiling timely by August 1, 2011 was a major contributing factor, the market response would not likely have been quite so horrific had not been for the coincident situation in Europe. For anyone who does not recall, the Euro-zone had been inching toward a resurgence of its Sovereign Debt Crisis all through the summer.

And as it happened, its crunch point also hit right into the beginning of August 2011. Considering the strides it has made since then, there is not likely to be any similar additional weight from Europe now. Part of that is the degree to which reforms have to a limited degree lowered the sovereign debt burden. Yet even more to the point is the expansion of the tools which governments and especially the European Central Bank now has to address any dysfunction.

There was no OMT or LTRO or ESM or other facilities in place back then. And if anyone needs a sign of just how well Euro-zone economies and markets can weather dislocations now, just look at the recent situation in Italy. Silvio Berlusconi was up for expulsion from the government in the wake of his tax fraud conviction. And while he attempted to bring down the government by withdrawing his faction from the coalition government, his ministers decided to stay in the fold when they realized the government would survive.

So the latest potential Euro-zone crisis ended up being a classical ‘tempest in a teacup’. Which is not to say they don’t have their problems. Yet, as ECB President Draghi pointed out in a somewhat downbeat assessment of the Euro-zone economy at his Wednesday post-rate decision press conference, he stands as ready as every to defend the currency union with support for individual members. Given his track record, it is not likely there will be the previous sort of European stresses to aggravate any US failure this time around.  


Anyone who has not already read it (and viewed the very funny Jon Stewart clip), please see Tuesday’s post for our assessment of all the mistakes the GOP has made. The bottom line is that while ingratiating themselves with the right wing of their party, the Republicans have lost the war. They have allowed the Democrats to characterize them as over-reaching on what they expected the President and his party to do under the auspices of a budget negotiation. Legislation by shutdown threat is not going to work.

▪ And the equities have been more resilient (at least so far) than is reasonable in the face of potentially far more damaging lack of any Debt Ceiling agreement in Washington DC. We have current (as in recorded this morning) TrendView Videos available in our post from just prior to this Commentary, and encourage anyone who is interested to view those for more specific macro-technical trend perspectives.

Thanks for your interest.

p.s. As we are just back to blogging after a lengthy hiatus, some of the information on the blog is a bit dated. We will be clearing that up soon, and all of the current critical information (Calendar, Perspective, Technical Projections) is up to date.

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