As the endless debt ceiling nonsense continues unabated this morning, the markets are telling an interesting story. SPY (which represents the S&P 500) is down .75%, while TLT (ETF for 20-year treasuries) is up 1.34%! What's going on?
The message is split. If the current "Capital Hill Circle Jerk"© proceeds through Aug. 2 (only 4 days away!), the government will be forced into a partial shutdown: workers will be furloughed, parks will be closed, medicare and medicaid reimbursements may be held back, and social security checks may be reduced or delayed. Certain to cause an economic slowdown, or maybe a double-dip recession!
Whether or not a deal is reached before "Tim Geithner Turns Into A Pumpkin Day", it's becoming more and more clear that real spending cuts are coming down the pike, and they'll hurt. Contrary to Tea Party rhetoric, austerity is not good for the economy (at least in the short term). So, regardless of the timing of a debt deal, this will exacerbate an economic slowdown.
On the other hand, the sturm and drang over potential default has been overdone. Interest payments are not due till August 15, nearly two weeks after Geithner's spending cuts kick in. Well before that time, the entire country will be in a lather, the political pressure will be too much, and a deal will certainly be made. Additionally, if Uncle Sam tries to stiff bondholders, expect the courts to issue an injunction preventing default, as I suggested here. Treasuries are gaining further strength because the market anticipates economic weakness, as mentioned above.
So, I was wrong a few weeks ago. Buy treasuries here.
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