I am not for sure what happens with the debt ceiling. I believe that a deal gets done or the markets won’t care, where they are not legally obligated to care (ie credit agencies). I will admit that I have grown even more unsure, I guess that is part of their negotiating tactic.
I realize that my thinking that a deal getting passed and/or that the markets don’t care is in the minority. It is also never wise to ignore a risk.
I believe that much of the rally in the indexes has been fueled by two themes. Rally heals everything and is being paved by the pessimistic.
Rally heals everything.
Nothing will make people forget their problems like a rally in the Dow. For whatever reason the public and some journalists believe that the economy and the stock market are related. As we can see they are not. A rally will also force people to realize they are missing out and force investment. No investor wants to be left out, especially one that got beat up. People feel better if their assets are appreciating even if only on paper.
Pessimism.
It appears that the World is always ending, everyday. The shorts have had a couple of good runs but you have had to be very careful. The S&P 500 has violated major moving averages only to pop back up. We have absorbed Japan, the Euro, and countless other problems. This is market is resilient and that is partly because of the pessimism. When we look at the first 700 or so points of the rally in the S&P 500 it will be refereed to as the least participated rally in history. How many bullets do they have left?
Too big to fail.
The purpose of the bailouts was to help ease the counter party risk that would send the financial system into a spiral. Some argue the financial system would have been fine but at least most people will agree the reason behind the bailout was that. There is no entity that presents more counter party risk than the United States. We are too big to fail.
Optimistic.
I am optimistic that as big of screw ups we have elected that they do not want to be responsible for starting the launch sequence that assures mutual self-destruction. They wont waste 3 years and &800 billion. If they do. I am optimistic that there has been enough time for there to be a private solution. But when the private profits instead of the people, blame your politicians. Maybe the answer is a default. We will see how the market opens up.
Whatever happens, I hope we don’t waste THIS crisis.
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