The good news, economist Ed Yardeni points out, are
estimates of corporate profits 12 months ahead show significant growth. So gradually things have kept improving.
The bad news is the U.S.
is running unsustainable budget deficits.
The President and democrats are seemingly oblivious to the consequences. Republicans want to rein in spending but lack
the votes to change policies. On
Thursday this could come to a head as the government reaches a self imposed
borrowing limit. The debt is so
overwhelming large that the government must borrow more money to pay bonds that
come due now. (Did not Madoff go to jail
for doing just that type of shell game?)
The immediate consequences of not paying back bondholders include
higher interest rates. Also most
insurance companies and banks hold bonds as part of their capital structure. If
those issues become worthless, even for one minute, most financial companies
will fail to meet the minimum capital standards. That means they are bankrupt. Remind you of 2008? It should but then it was derivates which
became worthless. The government stepped
in and guaranteed their payment to avoid complete collapse. There is no way the government can guarantee
its own default. Expect chaos.
My view is the $1.5 trillion in overspending was going to
come to a head within a few years debt deal or not. A Greek type collapse would occur. So it is awkward, hard, expensive and
embarrassing for the U.S.
to go through today’s reality show. But
is better for everyone to solve the problem and not let things go the Greek
way.
What do I think will happen?
Interest rates will spike beginning now. The stock market will go down
substantially. It could be a 50%
decline. Eventually (months?) there will be a debt deal. The bank regulators, a future deal in mind,
will issue a capital waiver and keep companies out of technical
bankruptcy. That does not help companies
who need their treasury holdings to be repaid so they can pay bills. This includes some giant mutual funds and
money market funds.
In the past when U.S.
stocks collapse so do international stocks.
A market collapse would be a great opportunity to add stocks. We will add shares in companies which make
products we use everyday, recession or not.
Food, water, power, phone service are examples. We expect a significant rebound in stock
prices whenever a debt deal is reached.
What can you do?
Email and call your Congress members and lobbyist. Say overspending and socialism are bad for
business and America .
Roger O. Groh
