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Paging Pollyanna . . .


Maybe, the wall of worry or the wall of uncertainty that is retarding Wall Street is coming down?

First, I’ve found it odd that Europe has suddenly become so agreeable to saving Greece over the past few days.  Then, I realized the Chinese Prime Minister was visiting in Europe.  What a coincidence?  Like any good fund manager, he has come to Europe to take advantage of cheap distressed sale prices there.  Saving Europe would not be a stretch for China, which has over $3 TRILLION in reserves.  He may pledge to buy some Greek bonds or even buy some existing credit default swaps, thereby secretly absorbing some of the credit risk.  Or, he may agree to inject capital into European banks.  There are many things the Chinese can do to “fix” Greece, but what will they want in return?

Second, with QE2 ending this week, the bond markets are holding their breath.  What will happen at the Treasury auction?  Will interest rates rise slowly or quickly?  Is the stock market dependent on the easy money of QE2?  One way or the other, that uncertainty is going away very soon.  And, don’t forget, the Fed can change their mind instantly and begin QE3 if necessary.

Third, despite all the theatrics and name-calling, real progress is being made on the debt ceiling/budget cutting negotiations.  While I am adamant the debt ceiling increase should not be connected to the budget negotiations, I am more optimistic about the debt ceiling.

Don’t forget that the Treasury has no resposibility to pay bondholders last.  In fact, they have a contractual responsibility to pay bondholders first.  If I were the politician in charge, I would continue paying the bondholders and quit paying Social Security recipients.  The riots in Greece are nothing compared to what happens here if the Republicans don’t raise the debt ceiling.  I don’t believe that catastrophe will occur, which reduces uncertainty.

Also, I am more optimistic about the budget negotiations.  The question is no longer whether to cut spending or not.  The question is how fast.  Already, both sides agree on cutting the defense budget.  Already, both sides have agreed on $2 trillion in spending cuts over the next ten years.  Already, both sides have agreed that no tax rates would be increased, instead fighting over tax giveaways to oil companies, certain deductions for the rich and some business deductions.  Again, uncertainty is reduced.

Once that wall of uncertainty reaches a certain point, the bull market will return, but we’re not there yet. 

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