Debt Deal Done: Will the U.S. Get Downgraded?


Well, well. Congress did it. And more than a full day ahead of Treasury Secretary Geithner’s absolute deadline on Tuesday, August 2. I will admit, I’m surprised. Not that they reached a deal — after all, I playfully wagered my entire business that a deal would get done with High Yield Wealth editor Steve Mausy. But I figured it would be a midnight deal.

Of course, nothing is signed, sealed and delivered just yet. I expect that may not happen until this evening. But the rhetoric from Congressional leaders and the president suggest the signatures are a formality.

It would seem that the financial markets’ message over the last few trading days was received. Stocks were approaching some pretty important support levels. And members of Congress are investors, too.

Will this deal be enough to keep the ratings agencies from downgrading U.S. debt? I’d like to think so. It seems to me that the ratings agencies have been a little overzealous in targeting the U.S. rating.

Economists are split almost down the middle, polls show. Roughly half say the U.S. credit rating will be lowered.

How much does that matter? Probably not much. U.S. Treasuries are still the safest government debt in the world.

Now, maybe, we can get back to focusing on 2Q earnings, which have been excellent so far. Earnings per share have topped have analyst estimates at about 78 percent of the 305 companies in the S&P 500 that have reported so far. Net income has grown 19% and sales have increased 14% according to Bloomberg.

I’ll say it again, companies have done an excellent job adjusting their production and payrolls for current demand. There is no incentive to hire new workers at this point. The suggestion that companies are not hiring due to uncertainty about government policy or debt levels, or whatever, is just silly. It’s a political fear tactic.

Companies hire to meet demand. And with consumer spending levels essentially set, there’s no need to hire.

The question is, where does new demand come from? Absent new initiatives from government, it’s hard to see where we could see new demand. And so, we should expect unemployment to remain high.


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Gold prices are off today, as the safe haven is less necessary after the debt deal. The U.S. dollar is also stronger. That’s particularly important, as the dollar was plumbing some serious depths.

We often see stocks and the dollar trade inversely, that is, stocks sell off when the dollar rises. But at least for the next week or so, we can expect to see stocks and the dollar trade in tandem as relief about the debt deal lifts both.


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