"Let me tell you what's involved if we don't lift the debt ceiling: financial collapse and calamity throughout the world. That's not lost upon me," commented Senior Republican Senator from S.C., Lindsey Graham on CNN yesterday. Treasury Secretary Timothy Geithner recently warned that we could be push up against the debt ceiling by March 31st, and while the Republican party took control of the House in November with the promise to deliver budget cuts, it appears that senior leadership is already backing down from using a vote to increase the debt ceiling as a political weapon. It will be interesting to see how many other senior republican lawmakers join Senator Graham's chorus in the coming weeks. I would imagine that many freshman lawkmakers do not understand the full implications of their vote on this matter. While I don't anticipate a failure to pass another increase in March, it is yet another reason for investors to be wary of chasing beta. Coming into this vote and the final months of QE2, I would expect that institutions will begin to decrease VaR, probably most profoundly affecting the Nasdaq darlings and high beta small-and mid-cap names.
In another intersting turn, Defense Secretary Robert Gates announced yesterday a plan to shave $78B off of the Pentagon's budget over the next five years. While Secretary Gates has been characterized in a number of publications over the past year as something of a Six Sigma-style-COO with budgets and efficiency measures always on his mind, this announcement is still an interesting opening salvo in what is likely to be a face off between Republican deficit hawks and Keynsian influenced Deomcrats. This announcement, again while expected, will likely only increase speculation that Obama will use the Defense budget as one of his key leverage points against non-cooperative Republicans. Obama could propose greater cuts to the Defense budget and thus drive a wedge between Republican lawmakers who truly believe in the need for budget reductions vs. those who are only acting hawkish in order to appease the electorate and secure the Presidency for the Republican Party in 2012. While battles over the budget are likely to be fought for years to come, I wouldn't expect any real action one way or the other until either a) US economic data (esp jobs data) markedly improves and appears sustainable, or b)the 2012 Presidential Election has concluded (regardless of who wins.)
The nonfarm payroll number for December was released this morning to great applause. Unfortunately the 9.4% reported includes just 103,000 jobs created, while dropping 260,000 unemployed workers from the labor force. Renowned economist Peter Morici reminds that we need to add an average of 350,000 new workers each month to bring unemployment down to 6% by 2013. No wonder that the majority of economists today assume unemployment will stay high for some time. Until there are real efforts at either job producing stimulus, an effort to block the flow of jobs overseas (if nothing else than at least public and political will aimed at corporations to behave patriotically), or a push to support new secular growth producing industry (world leader in electric cars, nuclear power plants, etc) then we will continue to see the strength of the American consumer diminished.
