Markets Perplexed as D.C. Lumbers Toward Debt Ceiling Finish Line

Includes: FXE, FXF, FXY, UDN
by: Ralph Shell

It is really foolish for markets, and an analyst thereof, to attribute so much importance to Washington. But with the government using borrowed money and its taxes, now called revenues to usurp an ever-expanding share of the GDP, it cannot be ignored. Government actions today do impact the future, but there is often a fuzzy relationship between the timing of cause and effect.

The current housing crisis is an example. The seeds of the current real estate debacle began in the late '70s when someone in the Carter administration decided that banks, having a physical presence in a neighborhood, must make loans there. Redlining those economically blighted areas would be considered an act of discrimination.

Until the Clinton administration took office, this law was ignored. It was then decided home ownership among lower income groups was a good thing, to be encouraged even if lending standards had to be relaxed. Banks, facing lawsuits for discrimination, relaxed their standards and aggressive lending to finance the overbuilding began. This enabled Wall Street to offer new investments to the world, enriching managers at Fannie and Freddie Mae as well as the brokers and investment bankers.

The creation and the dissolution of the real estate bubble is an epic tale, no longer contained at US borders. China, for example, is rumored to have a bubble waiting in the wings, to be punctured.

Today in Washington proposals to resolve the debt ceiling crises are being finalized in the House. The Senate says all 53 Dems will vote against it, so the House plan is a no-go. Sen. Reid claims to have a debt ceiling plan also; however, even Dem senators admit they have not seen a copy of the plan. The White House does not have a plan. Its only new input this morning is the accusation that the House plan, the only complete plan in play, being prepared by Speaker Boehner, will spoil Christmas, and Obama speaker Jay Carney said the House Repubs are acting "incredibly juvenile." Really?

Rumors are circulating that Boehner has the votes for his plan to pass the house. What the Democrat Senate will do then is a mystery. Republicans want to slow the Federal spending, now on steroids with the current administration. The Dems want a campaign issue to blame on the Repubs when the economy slows down further.

Either way, a slowdown in the US economy seems likely. Consumption plus investments and government spending are the major ingredients for US growth. Don't look for the consumer to be aggressive with wages flat, unemployment up , and the price of gasoline acting as a stealth tax. Investors likewise cannot be anticipated to help. Threats of higher taxes, a bevy of new regulations, the stifling anti-business proclamations from the EPA, and Obamacare are all investment and job killers. Lastly, the state and local governments will also feel the pain of less federal money and reduced taxes, causing them to contract.

There is a train wreck coming and some of the Washington players, knowing they are unable to fix the problems, are now looking for ways to point the finger and share the blame. If there is a fix to this pickle, please tell me because I do not see it.

Granted a weaker USD might stimulate exports, but is the USD really going to remain that cheap? Bond rates in Europe outside of Germany are creeping higher with Spain and Italy 10-notes trading for 6%. Compare this with the ease the US sold $99B of three-, five- and seven-year paper. What if the USD does not remain weak?

We prefer to watch rather than take a stand in these treacherous markets. But do you really want to buy the Swiss franc, one of the most overvalued currencies, when specs are already long 86% of the futures open interest? The AUD printed a new high yesterday, but the open interest in the futures went down indicating shorts had to bail. Specs in the AUD are long 93.1% of the total OI. Is this still a buy? The yen keeps gaining on the USD, like the 76.21 earthquake high is a magnet. Perhaps that remains a safe buy versus the USD, but the 14 day RSI is 26.8. Remember the Chinese are the biggest trading partners of the Japanese and the Australians.

Some say the markets are always right, but if that is truly the case, why do the prices keep changing?

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Markets Perplexed as Washington Lumbers Toward the Debt Ceiling Finish LineMarkets Perplexed as Washington Lumbers Toward the Debt Ceiling Finish Line

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.