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What the Debt Ceiling Means to You!


Crosscurrents collide in our mid-week freak.


In 2008, I offered that the crisis would cycle through the financial, economic, and social spheres. It now appears to have infected the political spectrum as well.

As European leaders navigate the most dangerous economic juncture in the history of the Eurozone, stateside policymakers have been on a mission all their own -- to arrive at a bipartisan agreement to raise the debt ceiling.

While this topic is confusing to many Americans, it is actually quite simple: The United States has been writing checks at such a feverish pace that its coffers are running dry. Unless the legal cap that the federal government is allowed to borrow -- the debt ceiling -- is raised, our country will run out of money.

Before you react to that scary fact, please remember that the debt ceiling has been raised 74 times since 1962 -- averaging roughly once per year -- and most of the current debate is predicated on political infighting, competing agendas, and shameless self-promotion.

The government won't default; while that possibility exists, the resulting financial fury would make Lehman Brothers look like a pimple on an elephant's ass. No, they'll come to an 11th hour "rescue" that appeases both parties, avoids the worst-case scenario, and perhaps even makes politicians look magnanimous for their sacrifices in the summer heat.

Unfortunately, that's not where this story ends. In some ways, it's where it will begin. The US will still lose its vaunted AAA rating, in my view, which is an outcome that has already been signaled by the rating agencies. The venomous political process, coupled with the structural debt dilemma, warrants such a move and that will matter for mainstream America.

How? Two words: higher rates. The consumer, many of whom are over-extended on their credit or underwater on their homes, will be forced to pay more interest on their credit cards, car loans, gas prices, and mortgages. It won't be a sudden spike -- it will be a gradual bleed -- but those can be just as debilitating.

When an accord is reached -- and they'll make a big deal about it when it is -- the financial markets should enjoy a relief rally despite the negative longer-term implications (slower growth).

Through a pure technical lens, that should tack on a quick 5-7% to the upside. So enjoy it when it arrives and remember not to overstay your welcome -- you always want to leave a party while everyone is having a good time.

Random Thoughts

  • Or... Mr. Soros is just climbing through a regulatory loophole.

  • As discussed earlier, my sense is that we'll see a 5-7% rally once this debt ceiling silliness is behind us. I suppose, through that lens, the question is from where?

  • If we get a deal locked before the US debt downgrade, it would likely start sooner rather than later. If this drags on -- and/or if we get the US debt downgrade in short-order -- we could test the bottom of the 2011 range (S&P 1250) first.

  • Has it really been 2.5 years since Professor Atwater asked the question, "What Happens if the Ratings Agencies Over-react?"

  • When does our interest rate policy "officially" become outsourced?

  • For real-time analysis during market hours, try our Buzz & Banter. It's pretty snazzy, as far as those things go. There's a free trial for first timers so come on in.

  • Goldman (GS), Citi (C), Deutsche Bank (DB), the Semis, and the dollar remain viable guides as we find our way.

  • A lower dollar is a necessary precursor to, but no guarantor of, higher asset class prices. There are levels of support down to the DXY 70 level before we're officially in no-man's land for the stateside fiat currency. And yes, that includes the meat of the 2007-2009 financial crisis.

  • With the NFL season officially back on track, I was only too happy to indulge my better half yesterday by watching The Bachelorette -- with a smile! One question: why did the dude who was booted off fly all the way back to Fiji? Is he a glutton for punishment or what?

  • Goldman has traded great since earnings were reported -- and yes, it was down almost 30% into earnings -- but I've gotta ask the question: When does the insider sales window open (as it does after every earnings release)?

  • The IMF has their hands full. If you wanna see what they're full of, click here.

  • Remember when the Dow Transports broke out above TRAN 5500? Yeah, so do I, but now it's put in the second "lower high" since the initial Pop & Drop.

  • Can you imagine if all industries operated in the same manner as professional sports teams? "Hey Matt -- you've just been traded to for a biotech analyst and future considerations!"

  • Will the Jets be favored to take it all if they nab Nnamdi Asomugha from my Silver and Black?

  • Why don't they put Jack Bauer on The Bachelorette?


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