Equity markets have been nervous lately. Not just in terms of the current price retracement, but with a much greater degree of concern that the U.S., this time, is declining into an inevitable reckoning due to seemingly unsolvable governmental and private debt structures. Sovereign debt issues, QE2 cessation, and U.S. default fears, are all greasing the current slide. The markets also having an odd debate over the risks of inflation with, on the one hand, the belief there will be unavoidable repercussions of easy money, and on the other, the total lack of demand stemming from a stagnant and an increasingly jobless America. What with TARP being viewed correctly by the public as an entitlement program for the financial elite in this country, and the problem of two parties unable to provide hope for future job opportunities, traders are focusing on several primary realities.
(1) Job creation will be hard given that austerity means less growth and a slower economy. (2) China is a hype which has started to correct. (3) Over 25% of homes in the country are underwater and about 50% could not find a buyer for their market price if they tried. (4) Wall Street thinks Republicans are backing noble goals but are crazy to play with U.S. debt given the resulting negative play on world equity prices.
Number one. There is just no way around the negative impact of smaller government to the broader economy. Forget the economic debate. Cutting spending by cutting jobs will create a large whole which cannot be filled by the private sector. Traders are trying to determine whether the markets will have to cycle through a dominate Republican austerity reign of terror for several years or will have a milder not so austere compromise and split rule.
Number two. China has started a correction but who knows what an undemocratic monster economy correction will looks like. A hard correction would be unnerving since most strategic investment decisions by world economic giants would be altered.
Number three. Real estate is an orphan now with little hope. Practically ignored by the Obama Administration. It has always been the most important issue and for an Administration with a positive slogan as "Yes We Can", the reality became "Guess We Can't."
Number four. What can you say about tangling the possibility of the world largest economy defaulting for political gain. Now there's plan.
For traders, positive turns in any two of these four keeps this market moving higher.
