On Budget Deficits, Rating Agencies And IBGYBG
From Peter Tchir oF TF Market Advisors
Budget Deficits, Rating Agencies And IBGYBG
Never have so many, said so much, that's so wrong. It seems like a combination of deficits and rating agency action have sparked a myriad of comments, many of which are just plain wrong.
First, on the deficit. NEITHER party is reducing the existing cumulative deficit nor amount of debt outstanding. They are NOT creating surpluses anytime in the next few years (decades)! They are cutting the projected deficit. Yes, we will run annual deficits, just less than the currently projected annual deficits. The fact that S&P could figure this out, makes it clear how easy it is to see through the semantics and games politicians are playing. Yet, most of the popular press is treating the government plans as though they were creating surpluses. We have to stop hiding behind words. The reality is we have a large amount of debt. Over the next few years we have big projected deficits that will add to that debt burden. So far, no one has proposed a plan that gives up surpluses, just less additional debt. Lets stop fooling ourselves and address the real issue. No more celebrations over just making the future problem less bad.
Secondly, after getting wrong what the deficit reduction really is, they get wrong the likelihood. Talks about 2030 being balanced. Excuse me???? In November the talking heads thought we might see tax cuts expire. They didn't see new spending. In December, we got both! So within a month of mid-term elections the pundits and government couldn't get anything right. Why do we assume things will be better 15 years from now when we can't predict a few months out very well? Probably, the obvious reason. IBGYBG. I'll Be Gone, You'll Be Gone. That is the only way to explain why we want to argue about details 10 years from now and basically ignore the immediate problem.
After being forced to read and listen to so much just plain wrong about the deficit, we are subject to the same thing on the rating agencies. Is AAA versus AAA on negative watch materially different? NO! From a 'probability' of default perspective it means nothing. Is the outlook change surprising? Not to anyone who has been watching the deficit grow, stimulus and spending being applied at every opportunity, with minimal results. So it shoudn't be shocking, its not stating anything near term about likelihood of default. Watching people turning red in the face arguing that we are not close to default is mildly humorous as the rating change does not imply anything that bad.
Then why is the rating action causing the market to go down? The simplistic, and likely wrong answer, is that some entities cannot hold anything less that AAA. That is too far away. One question that we should be asking ourselves for about the 1000th time, is why do regulators based risk capital on the rating agencies? They have a track record that is not particularly impressive (to say the least). They get blamed by congress for their ratings, and then are guaranteed future existence by being made an integral part of future regulations. Insane, yes, but not the real problem here.
Stocks have rallied from 900's to 1,300 as the smart money bet on unwavering and unlimited government support. Tepper was spot on. He called it for what is was. Now, smart money may be realizing that game is over. There was already concern about the ability to continue the QE franchise, but this adds another obstacle to including it. There was always the hope of another round of stimulus on any economic weakness, this also just took a little hit. Today's market reaction is a direct result of a growing realization that the fed/government put may not be there, or may be struck lower than we realized. The pundits can continue to be wrong about their budget commentary, can scream til they are blue in the face that the rating agencies don't get it, but we have moved one more step towards that slippery slope where government support for stock prices is getting more difficult to implement.
The realization is probably helped by the timely realization that Greece is basically done. Greece has realized its time to haircut the existing lenders, and move on with a manageable debt load and a budget that makes sense without creating too much pain for its citizens.
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