Thursday, July 28, 2011

Time to Worry?

Four days from August 2nd and still no debt ceiling deal and a very likely first-ever downgrade of America's credit rating... Let's clear our heads for a second and try and see the forest through the trees:

Bonds and the Dollar
Consensus would have it that a U.S. credit downgrade would cause the dollar, as well as bond prices, to plunge and interest rates to soar... Let's look at this in China (being our largest foreign creditor) terms... A credit downgrading would still leave the U.S. with a higher rating than China and on par with Japan... And of course the Euro is nothing to write home about these days... Not to mention the fact that the U.S. is China's largest export destination... I suspect that if yields do spike, China will intervene (buy treasuries) like mad...

As I type, treasuries are rallying (interest rates are falling)... Fascinating that the flight to quality is, at this minute, a flight to the debt of the country whose debt situation is bringing all this to bear... Now how do you discount that one????

Stocks
History tells us that 10% market corrections are annual phenomena... I'm in the camp that says these pullbacks are healthy, essential even, in terms of the market cycle (a two-steps-forward, one-step-back sort of thing)...

Stocks are up 20%ish over the past twelve months, and, at this point, that double-digit sell-off is officially overdue...

Thus far a tsunami, triple digit oil, soaring food prices, and overthrown governments, for crying out loud, have only delivered single-digit blips... Now if this debt ceiling fiasco doesn't do the trick, I'm really going to start worrying!!

The Economy
We are indeed in uncharted waters... But come to think of it, the global economy has charted more than its share of uncharted waters (tech bubble, 9/11, real estate bubble, credit crisis, Iraq, Afghanistan, Hezbolla, Chavez, Tsunamis, etc., etc., etc.) over the past decade or so - and here we sit...

So what do we do now? We sit...

Stay tuned...

2 comments:

  1. Marty, All of the above growth has been supported by trillions of FED dollars flowing into the markets. What will happen when that flow stops? Teryel

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  2. Martin L. MazorraJuly 30, 2011 at 12:31 AM

    Good point Teryel, thing is, trillions of those trillions haven't flowed anywhere other than into bank excess reserves, much of which banks have deposited back with the Fed at .25%... Clearly all this priming, while keeping interest rates very low, which no doubt helps the stock market (perhaps that's what you mean) hasn't had the stimulus (near zero GDP, 9+% unemployment) effect the Fed was looking for... When that flow stops, interest rates will surely rise and bonds will finally begin to make sense... As for stocks, I like valuations and balance sheets here (no market prediction).... otherwise it's all about the global economy (again, no prediction)...

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