2011Aug8 Debt deal? Get Real!

ECONOMY - MARKETS - DEBT CEILING - DOWN GRADE:

Just one subject for today's update, everything. What a week it was, and it was all tied together. We started the week without a resolution to the debt ceiling. Apparently, no one is willing or capable of working out solutions to problems that are in the best interest of the country. All that matters is making your party look better than the other one, and there is nothing you could get blamed for later in the legislation.

The debt ceiling talks were drawn out and, ultimately, almost completely useless. Once again the buck was passed on down the line. Nothing in the bill addressed the structural problems that exist in our economy. No cuts were made to spending at all. There is a slight decrease in the amount we are going to overspend. The debt will increase as sure as the sun will rise.

As soon as this fluff piece was passed into law, the markets, here and abroad, roundly rejected the outcome. Markets began to drop like a rock and have not stopped, yet. The message is clear. Business as usual is no longer good enough. The U.S. needs to take a realistic look at our financial condition and make the tough decisions that will lead us back to fiscal sanity.

All across Europe austerity is the word of the day. Country after country recognizes the dire condition of their finances and are cutting back to save themselves. This has not been well received by the citizens, but they are cutting back anyway. We need a good dose of that here at home.

After largely ignoring our ever worsening economic condition, the markets are now discounting our ability to deal with this problem. Standard & Poors decided to give us a little nudge by downgrading our sovereign debt from AAA to AA+ with a negative outlook. The negative outlook means that further downgrades are coming baring some real change in dealing with our debt.

Yes, this is the same S&P that had AIG rated AAA right up until the day they went bankrupt, but at least they did what they said they would do. Back in April they said that anything less than four trillion dollars in cuts would result in a downgrade, and they actually did it.

So the debt ceiling deal started the downturn in the markets, prompted the credit downgrade which tanked the markets further, showing the true fragility of our economy. This could be the beginning of a downward spiral that feeds on itself and will be very tough to stop.

There is much talk today about all the money that corporations are sitting on. This is a good sign of the health of companies. Supposedly, when they start spending all of our worries will be over. Well, companies are sitting on cash because of the uncertainty in the markets and a lack of consumer spending. They are not about to commit funds for growth in an economic environment that lacks customers.

We agree. Our portfolios were allocated to all cash early last week and will stay that way until strength returns with buyers coming back into the market. As we often say, the ultimate measure is price. Are more people buying or selling Americas future? As of today the sellers are firmly in charge.