Friday, August 5, 2011

Debt Deal, Market Crashes, and Fundamentals

HARDI's economists at ITR provided us with this analysis of the recent "debt deal":

The Congress passed, and the President signed, a debt reduction deal that the Congress, President, and American people don’t like (by a majority of over 90% according to a poll on Fox News). If you listened to Monday’s Make Your Move on, you heard Talbot, Brian and I (Alan) discussing this. I’ll save the various comments for those interested in downloading the program and give you a single point of view.

The Debt Deal will do nothing to change our forecast for the next few years, 2014, 2019 or our projection of a Great Depression in the 2030s. The agreed-to $2.1 trillion reduction (if it actually happens) is too small to matter. We will still add about $10 trillion in debt between now and 2020, and that debt burden has the potential to crush taxpayers and the US Dollar.

Despite such shortcomings, there is a ray of sunshine. The needle moved a fraction of an inch toward a financial reality that might be called rational. It was hard fought and nobody “won” (US debt reached 100% of GDP after the debt ceiling was raised); but perhaps, just perhaps, we have seen the beginning of a potential movement toward financial realism in this country. Let’s hope so.

Yesterday's tanking of the stock market is raising new fears about our economy. Today's slightly better-than-expected jobs numbers and a largely symbolic drop in the unemployment rate to 9.1% has only slowed the rate of the Dow's contraction thus far. Here's a good WSJ video explaining why the debt deal led to a sell-off. That being said, I find it necessary to remind business leaders of our economists' continued conviction that basic industrial and broader economic fundamentals do not support a "double-dip" forecast. Further, the WSJ published a piece today recommending patience at the least (online subscription req'd) and ITR recommended at the beginning of the year aggressiveness with regards to real-estate and other large/long-term expenditures such as leases, vehicles, and infrastructure or equipment upgrades because money is still cheap and corporate earnings, profits, and cash continues to be solid. Be sure you're taking in all the data, and the advice of the most proven experts before making any knee-jerk reactions.

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