September 29th, 2013
by Jeff Miller, A Dash of Insight
The most important issue facing the US markets and economy is the pending government shutdown. If this expands into a debt default, the implications reach worldwide.
As I accurately forecast last week:
"Despite a busy economic calendar this week will focus on Washington and the inability to compromise on important decisions. There are two key questions:
- Can a government shutdown be avoided?
- Will the U.S. default on its debt, by failing to raise the debt ceiling?"
The background and discussion still reads well, so I urge readers to check that out as a refresher.
An Important Distinction about Politics
Regular readers know that I strongly recommend separating your political viewpoints from your investing. You should join me in being politically agnostic—willing to invest successfully no matter who is in power.
It is fine to have an opinion about ObamaCare, about debt, about European leadership, or about the Fed. Feel free to express your viewpoints in personal discussions or in the ballot box. Stop there. Confusing what you hope will happen with what probably will happen is the fast track to investment losses!
When I discuss policy issues, I am helping you to predict what will probably happen and also the investment consequences. I have been extremely accurate on every important policy decision for many years – Europe, 2011 debt ceiling, fiscal cliff, etc. – often in disagreement with the majority of pundits. I have never expressed personal preferences, but instead emphasize how to profit from likely outcomes. I regularly cite sources covering a wide political spectrum. Discerning readers might note that I find the viewpoints of extremists of all types to be market-unfriendly. Mainstream thought, from whichever party, is better for investments, whatever your personal views.
The implication for investors is that gridlock leading to a default on U.S. debt is bad. This is an investment conclusion, not a vote on ObamaCare.
At the time I am writing this, a government shutdown seems to be unavoidable. Some key points:
- Polls show that both parties will be blamed for a shutdown. This encourages brinksmanship.
- Obama has little incentive to negotiate. See Ezra Klein's analysis of the "Putin" argument.
- The GOP is ready to rumble! Veteran Hill observer Stan Collender writes that their "lesson" from the Clinton-era shutdown is that they were not aggressive enough.
What does this mean for investors?
The two themes – the shutdown and the debt ceiling -- have become linked. Originally Speaker Boehner wanted to avoid a potential shutdown, preferring to use the debt ceiling as leverage. Under pressure from the Tea Party wing of the party, the House passed a continuing resolution that eliminated funding for ObamaCare. The Senate stripped the ObamaCare portions from the bill and sent it back. The House (at least at the time of writing) is standing firm and the Senate is in recess until Monday afternoon. There is no chance for agreement on the House bill.
What will this mean for stocks? I have some thoughts which I'll report in the conclusion. First, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.
In contrast, I highlight a smaller group of events, including some you have not seen elsewhere. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.
My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topicthe week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
Despite the stock market reaction, this was a pretty good week for economic data.
- Household wealth has improved dramatically. Scott Grannis writes as follows (but see the inequality link in "The Bad"):
"…(H)ousehold net worth now stands at $74.8 trillion, up some $4.5 trillion from the previous (March '13) estimate, and up $18.4 trillion from the recession low. Virtually every metric of households' financial health has shown significant improvement over the past several years. Owner's equity in household real estate has surged 50% since 2009; net worth and financial assets are up 35% from their March 2009 low; the value of households' real estate holdings is up 17% in just the past two years; owner's equity as a percent of household real estate has jumped to almost 50%, up from its all-time low of 37% four years ago; household debt has declined by almost $1 trillion from its 2008 high, and is now back to the levels of early 2007.
Net worth at a new high, financial assets at a new high, real estate values recovering, debt declining: what's not to like?"
- Jobless claims remained low, confirming the recent data points. Jobs are easier to get. Dr. Ed Yardeni looks inside consumer confidence data and jobless claims. See his discussion of what this means for unemployment.
- The Chinese flash PMI rose to 51.2, a six-month high. The "official" report is usually stronger.
- Personal income and spending edged higher than expectations. Doug Short provides a helpful chart update, as well as his "Big Four" noted below.
- The chemical activity barometer suggests an upside surprise. Calculated Risk analyzes this "new" indicator, which seems to lead industrial production
- Durable goods orders rose slightly and beat expectations of a decline on the headline number. Steven Hansen is not convinced. See his analysis with the variety of comparisons we all expect from GEI.
- Bullish investor sentiment from the AAII declines – good news as a contrarian indicator. Here is the updated chart from Bespoke.
Click below to read more.