Budget Negotiations Could Hinder Equity Market Continuity

Includes: SPY
by: Joseph Sabbagh

As the stock market has registered new highs and a vastly improved investment environment surfaces, one must not overlook the means to which we achieved this price recovery that originated in the aftermath of the Fed's management of the economic crisis and the uncertainty that continues to cloud its final outcome. The public opinion is still very sensitive to the political commentary that continues to dominate the airwaves with the initiation of a new round of budget bantering that can destabilize the frail tower that stocks have painfully labored to reconstruct.

As it stands, the public is not fully convinced that this massive liquidity driven rally, artificially produced by the Fed's QE continuum, is the prescription for relief or remedy for a cure with an economy living with a condition that can soon be deemed terminal. Debt to GDP ratios are representative of the economic health and independence we maintain as a country and the options we are afforded to extend financial life expectancy. The leadership we maintain globally, from defense to diplomacy, is a product of the economic influence and strength our economy projects. With a staggering $17 trillion debt load and a Debt to GDP ratio hovering around 75%, we compromise the immune system and the engine of growth that preserves its continuity. With four more years of this limitless spending, this administration, never having approved a budget, walks the unencumbered road to a 100%+ Debt to GDP distinction.

The end of QE subsidies, having artificially supported US Treasury issuances, while suppressing interest rates will eventually come to an end without having a desperately needed budget and proportioned advance in growth to offset the monstrous financing expansion. US debt service expense will grow geometrically, with no way to contain the rapid rise in rates across the curve that will be necessary to attract purchases and absorb the supply of trillion dollar issuances. This will debilitate the economy from rehabilitating its balance sheet and cannibalize the supply of credit.

The Ryan Budget presented is a new dialogue and framework for a solution to create a way to manage and stall the spending momentum and deliver a responsible message to the markets and the public that can provide a sense of reliability and predictability. Although, resistance immediately surfaced with a counter offer from Democrats to add $1 trillion in new taxes over the next ten years and launch a $100 billion stimulus as a chaser. A new round of political dissension can produce a wall of uncertainty that can slow or prevent the further flow of funds into the equity markets and begin a short term correction leading to another period of confusion, neutralizing confidence and producing a protracted market consolidation.

With a shortage of ideas and fiscal choices, the immediate solutions should not be to sabotage negotiations and impose another hike in taxes, but should be cognizant of the already burdened public and the trillions of real dollars in corporate profits in offshore accounts that repel our shores and are re-invested in domiciles befriended by capital. Let's also be mindful of the already egregious estate tax that threatens to confiscate the inheritance of "millionaires and billionaires" that can be wiped out in just two generations and make permanent the "equalization" of society and the loss of commercial ambitions. The public should not ignore and try to understand that the unannounced trade wars being waged globally by debasing currency valuation is the means to compete for exports in a world economy desperately clinging to secure all opportunities for growth.

This budget proposal should be the platform to advance the markets and investments on their own trajectory and eventually substitute the artificial support manufactured by the Fed and create a tax friendly environment that repatriates a multi trillion dollar stimulus supplied by corporate offshore capital to sustain the market continuum.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.