Chillin' out till it needs to be funded
Far from being a AAA example to the world, America has been living on the brink for more than 2 years now, looking at Europe and keeping rolled up QE2 Dollars to make the dinner date a little bouncy and engaging.
The Chicago PMI followed down but is considerably positive at 58, the Philly and NY Fed Industrial activity dull but retail spending strong through July, Housing data confusing and bad but not deteriorating further, Deterioration in May in the Housing Indices matched by a volatile uptick in June., and even Oil is down. However, with the US not able to add revenues to manage its deficit it will have a dull shock waiting for it when it cannot spend next week as the debt ceiling shuts down its ability to spend in the middle of its date with destiny, where it was well on its way to prove itself, just on the brink
The bounce in the second half is now looking unlikely with the GS revised H2 forecast of 2.5% also likely to be beaten down a few notches if every week is going to be a debt deal nego.
I have no confidence when a system that allows John Boehner to parade his impossible proposal for 3 days and then an equally unacceptable Harry Reid proposal from the democrats, that any thing will be signed by Aug 10, much less Aug 2. A lot of payments will be postponed and when we have lived through a shutdown of government we will live through non payment of social security too. But sooner than later, this tied shoelaces Presidential form of government will be the one blamed, with the Republicans definitely out of currency with their seemingly intractable lobbies and even slow paper dance games that just show down themselves much more than anyone else. Beware Bush’s days are no more and their is no way that you will get a chance to pay for anything ever again. So., take this chance to cooperate with the government while you can unless you just want to ride a falling star all the way down.
There are others in Greece and Italy that are cutting spending and they have all but signed off on growth to pay their debt. France cannot avoid it either but US can and has maintained growth till now. It should continue to find a way to finance growth and leverage its value as the world’s reserve currency in what is well its last chance to.
The impact of a downgrade
Interest rates are unlikely to rise too fast but only if a debt deal is struck valid for a two years and not something which is up for revision every 6 months. Also the deficit has to be tackled, cutting growth spending or stimulus is the flawed mechanism that will cause most of the hyperbolic black swans and the hyperbolic increase in consumer rates etc
However fiscally overage and yet profligate cities and states would have to shutdown as their debt (leave alone new issuance) would be worthless right now.
And equities and commodities will keep investors laughing all the way to the bank as long as the Dollar is weak. The caveat in this last most probable scenario being if their is a confidence crisis and thus a flurry of withdrawals by US and international investors into cash. This week US funds have seen withdrawals of $7 bln from stock funds
There have been some positives of the spending crisis already, with the Federal Aviation Authority mandate lapsing and Airport taxes being refunded to consumers since last week