Financial markets have exhibited a ho-hum attitude towards the lack of movement in Washington's budget negotiations . . . until now. Wall Street is getting nervous about the possibility that lack of a firm deal will send interest rates soaring and equities tumbling. Europe is also getting nervous about Washington's games, with the IMF scolding the lone hyperpower as if it were a collapsed emerging market in need of intervention.
Our leaders are playing with fire and the increasingly likely consequences of their games will be a stock market crash. If a ratings downgrade forces the U.S. to raise its effective bond yields, countries that normally have to borrow on AA or worse credit will quickly find themselves crowded out of the global bond market. That is a recipe for an immediate credit crunch in some of the markets that have been very good to U.S. multinational firms' earnings this year.
This sad episode will not end well for the U.S. even with an agreement to raise the federal borrowing limit. The only community that is completely oblivious to the coming debacle is - no surprise - the mass of financial advisors whose unguarded optimism about the U.S. economy will probably put many of their clients in the poorhouse.
Full disclosure: Long FXI and GDX with covered calls. No positions in individual U.S. equities at this time.
