Posted By: Matthias Paul Kuhlmey
Seriously? These days, we are talking default (orderly or not) of two Sovereign Nations: The United States of America and Greece. Other countries are in line, but not quite yet. There is something wrong in this picture. It is hard to perceive that a country such as the U.S., given the size of her economy, not to mention her world dominance and influence, can be at the brink of default. The Debt Ceiling is a technicality. No other country, to our knowledge, operates with such a mechanism, and it “simply” takes the will of good and concerned leaders to make the necessary changes.
As political affairs in Washington and Europe have taken center stage and lead to increased volatility in markets, it is, once again, time to be cautious. Investors should hold more cash than usual (as opportunities in a volatile environment will surface), and observe previous support levels in equity markets. If the area in the S&P 500 around 1250-1260 will be retested (as twice before this year), and this level holds, a bullish reaction with significant upside potential could be the result; this could also be true for the USD, which has never been so cheap on a real effective exchange rate basis.
To be clear, we repeat our warnings that the Sovereign Debt situation around the world, mainly in developed economies, is unsustainable (please see our detailed outlook, Fairytales, from April 2011). The system, sooner or later, will have to “reset” itself. This process will most likely start in financial markets (presumably with the foreign exchange market leading), but will be completed with political interventions, thus removing aspects of free price formation.
What America needs, after relief from a technically adjusted Debt Ceiling, is a sustainable and enforceable strategy, with respect to income and spending. The era that debt is considered without significance or, for the most-part, lack of responsibility, needs to come to an end. It is not acceptable that debt is “simply” not paid off but “rolled-over,” while at the same time adding to it. The impact of a default would be horrendous, potentially leading to a state of shock in the financial system and the world losing confidence in the U.S., which is unnecessary.
It is time to “Think Outside the BunTM,” right?
P.S. The Taco Bell® Slogan – “Think Outside the BunTM” is courtesy of Taco Bell® (and parent company, YUM! Brands). You may consider another choice of cuisine.