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No Catastrophe: Big Picture Cliff Fears Dissipate

  • Written by Syndicated Publisher No Comments Comments
    January 20, 2013

    In my ‘Mid-Week Markets Update’ for subscribers I noted that “The worst parts of the fiscal cliff were either resolved or at least kicked down the road a couple of weeks ago, and the next expected political battle, over raising the debt ceiling, hasn’t heated up yet. And it may also turn out to be a non-event if today’s hints indicate the beginning of a change in the strategy of the Republican side.”

    I went on to quote some of the remarks made in Washington earlier in the week by Republicans, questioning the wisdom of holding the country hostage again by using the debt ceiling as a lever over the White House to force spending cuts in the next budget.

    And sure enough, this morning it’s being reported that “House Republicans next week will take up a bill to extend the U.S. debt ceiling by three months, House Majority Leader Eric Cantor said Friday, a move that would push the deadline for raising the borrowing limit to mid-April.”

    There are still those who don’t seem to realize, or at least admit, that so far every catastrophe envisioned by big-picture analysis since the 2008 financial meltdown has failed to take place, each worry instead veering to the side and disappearing over a cliff, similar to the plunge off a cliff that was envisioned for the economy, the stock market, and even global survival. 

    First it was that the massive stimulus and rescue efforts begun by the Bush Administration and continued by the Obama Administration, just could not work. And that in fact the efforts would only hasten the slide into the next global Great Depression. And the stock market could not possibly recover under those circumstances, but  was headed down to 1,000 on the Dow.

    Then it was that the bailouts were going to result in the U.S. government nationalizing the banking and auto industries, destined to be running them in bankruptcy as government-owned entities for decades to come, like the postal service.

    Then it was the certainty that the eurozone debt crisis was going to wind up with Ireland defaulting on its debt and causing the collapse of the eurozone with a devastating global economic impact. Didn’t happen? Oh, but then it will be Greece and its problems that will do it. Didn’t happen? Okay, but it will be Spain for sure since Spain is a much larger economy and no way can it be bailed out. Whoops. Okay then, but there’s Italy, and maybe France.

    Didn’t happen? Well their recoveries are only temporary. Just wait until a year or two down the road.

    But of course, life is what actually happens while we’re planning for how we think and hope it will play out.

    And bull markets are often what happens while those who didn’t see the downside of the last bear coming, are now convinced in the opposite direction that ‘this time is different’, and recovery can’t take place.

    So 1,000 on the Dow? No, a new bull market that more than doubled the market, while many public investors bailed out at an almost record pace right up until mid-2012.

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    But big-picture analysis still said catastrophe had only been delayed.

    Agreement could not possibly be reached by year-end to extend the Bush-era tax cuts, and the economy was going to plunge over the fiscal cliff into immediate recession

    Whoops again. Agreement was reached on some key issues after all, and the rest were kicked down the road for further debate and negotiations.

    But immediately it was that the debt ceiling has to be raised immediately, or the government is not going to be able to pay its bills by February and will be forced to shut down, finally bringing catastrophe.

    Well, dang. Now they’re kicking that down the road too, until mid-April to give themselves more time to hammer out a budget compromise?

    Well just you wait. There’s still a lot of big-picture stuff waiting to fall on us. Like Iran is close to having a nuclear weapon. And there is still all that unrest in – well everywhere.

    But the big one is how could the U.S. possibly dig itself out of its government debt mess. It’s never had such a problem.

    Really?

    The Reagan Administration piled up what was then record government debt in the 1980’s in its successful effort to pull the economy out of the financial disaster of the 1970’s. And guess what? It was during a period of high interest rates.

    So as the next chart shows the government’s interest payments on that debt were much higher than today’s cost of carrying the higher debt load out into 2015.

    Not that it won’t be a painful and difficult process to bring the debt under control again, but wehave been there before.

    Meanwhile, I find it challenging enough to time the market’s intermediate-term rallies and corrections and its occasional bear markets.

    I just don’t know how to attempt to predict the generational moves or catastrophic events that might take place, mostly because the evidence shows that they rarely do take place.

    I’ve written about that often. For instance Think Cycles Not Endless Trends in 1999, andMissing the Good Times By Concentrating on the ‘Big Picture’! in 2001.

    But speaking of the intermediate-term, if Congress as now going to extend the debt ceiling until mid-April as is being reported this morning, how will that play out with the favorable season rally, the earliest exit date of April 20 for our Seasonal Timing Strategy, the basic Sell in May and Go Away, etc., and of course for our buy signal in our non-seasonal Market-Timing strategy.

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    To read my weekend newspaper column click here:  Corporate Hoarding Of Cash May Soon Become A Big Positive!

    Subscribers to Street Smart Report: The next issue of the newsletter will be available in two trading days (Wednesday) in your secure area of thStreet Smart Report website!

    Images: Flickr (licence attribution)

     

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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