Senate Budget Shows Worst May Be Yet To Come

Includes: DIA, IWX, QQQ, SPY
by: Adam Alvarez

For the first time in four years the United States Senate has passed a budget. Of course, in this particular situation the term budget is rather ambiguous. After all, instead of budget the average onlooker might accept this latest charade as nothing else but a greater encouragement for the government to spend more.

The $3.7 trillion allowance for 2014 steers away from any sort of spending cuts while focusing on further tax hikes and $100 billion in additional infrastructure spending supposedly set to stimulate the economy.

That stimulation, though, may pitter out in 10 years when the government is scheduled to be left staring at $5.2 trillion in additional debt.

Still, those behind the budget feel the economy can not afford to focus on only the deficit alone.

"The first priority of the Senate budget is creating jobs and economic growth from the middle out, not the top down," Democrat Patty Murray, chairwoman of the budget committee said. "With an unemployment rate that remains stubbornly high and a middle class that has seen their wages stagnate for far too long, we simply can not afford any threats to our fragile recovery."

Now the Senate measure, which barely passed via a final count of 50-49, will most certainly die in the House of Representatives. Overall, leaving Congress to once again convene in a probable emergency session in September to merely keep the government running.

For markets primed for a fall and the approaching summer months typically being a weak period for equities, a pullback is all but certain as investors turn their focus once again towards ensuing budget battles and a rising debt.

However, the question even now becomes for how long and to what extent can the economy and markets find ways to progress amidst a rising deficit and even more spending that is being pushed by some lawmakers?

It was ironic, if not frightening, that the latest measure by the Senate came forth at a time in which the nation of Cyprus is reeling in the face of massive deficits and bank closures. It's a sign, however irrelevant to Fed Chairman Ben Bernanke, that continued losses and uncontrolled gaps between spending and income do lead to desperate measures in any nation which takes such a path.

Now it would be widely controversial to assume the United States can also end up in such a plight. Still, common sense is left to question how our own nation can automatically remain immune to such a fall?

Even after tax increases at the beginning of the year and the elimination of the payroll tax cut, the deficit nears $17 trillion while climbing $3.87 billion per day. However, such red ink apparently is not enough.

Now it would be easy to look negatively upon big banks when such financial carelessness remains highlighted. That's especially true considering Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) all currently sit within 6% of their 52-week highs.

However, this lack of monetary discipline can also explain why other important sectors such as steel have also missed out on the recent rally. A perfect example is AK Steel (NYSE:AKS) which continues to post losses while shares sit at their lowest level in over nine years.

In the end, it can be argued there are already visible cracks in the market's floor. Even the Senate's unpleasing budget bill does little to repair the damage. Still, all investors along with politicians should remain aware of the dangers of an uncontrolled deficit. Otherwise, Cyprus may prove to not be the global exception, but instead the global rule.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.