The ongoing finances and debt ceiling points have arguably turn into as contentious because the Trayvon Martin case in social media. This is as vocally divided as I’ve seen my social media feeds. The left claims that the Republicans are solely in charge for our points whereas the best insists we can not spend ceaselessly what we’ve not received. Personally, I believe either side have their heads shoved very deeply up a heat and darkish bodily cavity. While Congress argues about how you can spend our cash and cash we’ve not received, they obtain a lifetime’s wage plus advantages for 4-6 years of labor but have the nerve to make use of the time period, “welfare state,” in public.
Whether you agree with the left, proper or someplace within the center is irrelevant on the earth of managing funds and buying and selling. What issues is empirical information, not conjecture. A fast survey clearly reveals that the financial system is beginning to sluggish as a result of authorities shutdown. Consumer confidence is plummeting together with Congress’ approval score. Government loans are being stalled for small companies. Mortgages are stalling as a result of authorities ensures cannot be secured. Customs is popping right into a choke level for international commerce as inspections cannot be completed and clearances cannot be granted. These are all quantifiable drags on our financial system and might be mirrored in decrease GDP numbers.
The earlier factors are all uselessly legitimate. We do not commerce US Customs quantity and our belongings aren’t invested in Brazilian oranges left rotting at a dock. Our belongings are straight positioned within the US monetary markets. I’ve spent the final week compiling a spreadsheet of debt ceiling negotiations and raises (there have not been any decreases) from the final twenty years and in contrast it to the almost certainly belongings to be affected: rates of interest, the US Dollar, gold and the S&P 500. Professors at all times say that financial selections are made, “at the margin.” Our philosophy has at all times been to remain forward of the margin calls within the first place.
The debt ceiling has been raised 18 instances since 1993. I selected this begin date as a result of it offers us 20 years price of knowledge throughout probably the most politicized portion of our historical past. Furthermore, the previous twenty years have participated within the increase of the data age the place the typical particular person on the road has had increasingly entry to increasingly info than ever. This permits all of us to make funding choices primarily based on absolutely shaped opinions on occasions as they unfold. Therefore, the information set needs to be consultant of the present funding local weather.
Based on what has occurred prior to now, how can we greatest place ourselves for the long run? Unfortunately, the information is blended, at greatest. Because I’m old skool and nonetheless do charting and modeling by hand, I selected a easy premise. “Where did the markets close the day before the debt ceiling was raised and where were they trading ten days later?” The vary of outcomes different little by path. The most predictable asset class is the rate of interest sector through the use of the 10-year Treasury Note as a proxy. Ten yr Treasury Notes traded decrease (increased yields) 11 out of 18 instances. This appears logical as elevating the debt ceiling ought to power us to pay extra in future obligations. It is price noting that the declines within the 10-year Note got here towards the backdrop of a 25-year bull run within the rate of interest sector.
The S&P 500 was the second most bearish market because it was decrease ten days after the announcement in 10 out of 18 cases by a mean of 1.6%. The S&P additionally retained its typical character of panic sell-offs. The largest acquire was solely 4.82% in May of 2003 whereas there have been 4 occurrences of losses better than 5%. Two had been better than 10%. The largest 10-day loss was a whopping 22.7%. Therefore, elevating the debt ceiling and conducting authorities enterprise as typical isn’t at all times a constructive for the inventory market.
The lone bull within the markets examined was the US Dollar. The slight bullishness within the US Dollar stunned me. The Dollar was increased in 10 out of 18 cases by a mean of 1.3%. This is the place a number of sorts of evaluation actually work collectively. Last week, we instructed that the Dollar is organising for a downward trending run. I stand by that evaluation. Monday, October seventh, Trader Planet printed a bit I wrote on the counter pattern bounce usually discovered within the US greenback after a number of strikes to new 30-day lows. The Dollar scenario as a complete confirms this concept. I count on the Dollar to rally short-term however fall over the course of time.
Gold was the ultimate market we went into. I did not look forward to finding a lot right here and I did not. Perhaps, the most important level to be made right here is that anybody making an attempt to speak you into shopping for gold as a result of the federal government is failing, inflation is coming, the Dollar is dying, and many others will need to have a hidden agenda. The information merely would not assist the gross sales pitch. In truth, the most important strikes within the submit debt ceiling changes in gold had been to the draw back. The common path nonetheless stays a coin toss because the gold market moved up and down with equal frequency during the last 18 cases.
Finally, there’s one final level to be made from historic proportion and I’ve to credit score my sensible nephew, Erik VanDootingh for tipping me off to it forward of the information curve. The markets are scared. Big, BIG cash is scared. This can greatest be measured by the distinction between the rates of interest that the US authorities is paying for loans versus what worldwide banks are charging to borrow from one another. Technically, that is the unfold between Treasury Bill charges and LIBOR (London Interbank Overnight Lending Rate). For the primary time in historical past, together with the 2008-2009 implosion, our authorities is being charged the next rate of interest to borrow cash than banks are charging one another. Interest charges are primarily based on danger. The increased the danger, the upper the speed charged. Let that sink in awhile as you ponder, “too big to fail.”
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