Friday, October 30, 2015

Budget deal is unequivocally bullish for stocks, economy. Buy the S&P and take a vacation until March 2017.

The biggest negative factor that we have been talking about here--the debt ceiling--is now out of the way until March 2017. We are in the clear, having averted what could have been a disastrous default of the entire U.S. economy.

With this new budget deal the amount of fiscal stimulus will be significant. Not only does the Congressional Budget Office anticipate a spending increase of over $230 billion over the next two years, the additional spending of $112 billion implied in this budget deal means that spending over the next two years will rise by nearly $340 billion.

That is significant and it means two things for sure:

1) The economy WILL NOT go into recession

2) You can go buy stocks now (buy the S&P Index, it's simpler) and basically take a vacation until March 2017. You will be handsomely rewarded.

I don't care what anyone is telling you about the deficit, they are going to be wrong. And if I end up being wrong here in my prediction, feel free never to read this blog again or mock me from now until forever.

Oh, and one more thing...the dollar will fall because some pricing power will return to foreign exporters. And if and when the euro rises it won't be because it has become "harder to get." It's all about price, not quantity. People should know that.

P.S. If and when the Fed raises rates (and they will) that will be an added fiscal stimulus. Those who have been saying here, that it doesn't work that way, can also call me out as ignorant if it in fact doesn't end up to be bullish.


Ignacio said...

Adverting debt ceiling crisis helps muddle through, not necessarily bullish. A lot of indicators are already at recession. Commodity bear cycle is the thing that is helping the most now.

Re. stock market... the S&P500 hasn't gone anywhere since 8 months ago (hence muddle through). Massive distribution over this period... A rate hike would hurt the stock market most likely at least initially (but bullish for fixed income and the money market).

mike norman said...

Ok, we'll see.

Greg said...

I mostly agree with Mike only because I think the stock market mostly works on emotions and the feeling amongst many of the investor (actually trader) class will be bullish. The debt ceiling scare and the sequester really put brakes on the markets I think.

Now, I do think Iggy is right about the fundamentals. Until average Joe gets better spending to debt ratio AND many of the well less than average Joes become average from getting some employment we will continue to see companies post lagging sales numbers overall. We need more consumers AND for current consumers to consume more!! At present that doesn't look like a reality. Largely because so many of our economic geniuses think that consumption is anathema to production/saving. They cant wrap their minds around the idea that consumption is the raison d'ĂȘtre for production. Who produces things that aren't intended to be used (i.e. sold/consumed) ??

Greg said...

What this means is that stock prices will be hard to justify after a while when sales numbers don't pick up. They will be able to play the "big sales are just around the corner" game for a few qtrs though.

Malmo's Ghost said...

I think the Fed will raise in 25bp increments but will be stopped in its tracks before they make it to one percent overall, if that. At any rate there will never again as far as the eye can see be a FFR of greater than 2%

Ignacio said...

Yeah Malmo, if there is a rise will be something stupid like 25bps. So basically means nothing.

Even going above 1% will be a feat, and the only real reason they are doing it is because when the next downturn comes (Mike, Matt etc. seem to believe we have eliminated the business cycle... maybe because the new normal is so bad that it's always the same crap hah!) they have ammunition again for ideological reasons.

What is a stake is the credibility of mainstream "central banking" ideology after all... Similar to the late XIX century challenge of the central banks.

Malmo's Ghost said...


It will be a psychological/cynical move by the Fed, not one informed by the mainstreet economy. The Fed is hoping for some easing ability so when they have to drop rates again (which they will in short order) they'll have some ammo in their chamber.

The Rombach Report said...

It was not necessary to raise the debt ceiling, because $18.424 trillion national debt is an illusion. Should be more like $15.96 trillion after accounting for $2.46 trillion of Treasury debt held by the Fed, which the Fed/Treasury should agree to tear up as if it didn't exist.

David said...

Okay, call me confused. I realize the removal of a potential debt ceiling fiasco is good news for the market but is this really good news for the economy? We have an increase in spending, spread over the next 3 years, of $85 billion yet we've had $123 billion in increased spending since 2013 with subpar economic performance.

I realize that any increase in spending is good for the economy, but taking into account inflation and the size of the current budget, will it be sufficient to support the slowing world economy?

Mike might be right and I admire his willingness to stick his neck out on this one. I just wish I felt so strongly about making a move.

mike norman said...

FYI...I am putting my money where my mouth is, buying every dip in stocks and the S&P and selling rallies in the dollar.

The Rombach Report said...

I would prefer to see tax cuts to government spending, but that just highlights my ideological color. Putting more of the money in the hands of the tens of millions of people who earned it, probably has a better chance of allocating it to its most productive use, than leaving it up to government central planners.

Greg said...


Putting the money to "more productive use" is a mostly subjective notion. Whats productive to one person is waste to another in many cases, but I do agree that giving tax cuts, especially targeted at working families making less than $100,000/yr would be more helpful to those families than a couple trillion of govt spending. At this point in our political environment I am against all tax cuts to the wealthy. Until we start having rational/adult conversations about economic policy instead of this "job creator" and "confiscatory taxation" bullshit Im in favor of taxing the shit out of them to pay for the things that are important to our country. If they want to play it like a zero sum game every time we get to some debt ceiling impasse then we will play it like a zero sum game all the time. When "we" need something we will get the money form those who have extra..... guess who that is?

Ignacio said...

People who doesn't pay taxes or very few do not benefit from tax cuts.

The disappearing middle class has to come to terms with the new feudal normal, spending must be done by people who is not doing the income and drop off the 'capitalists wannabe/American dream' complex.

Negative income taxes can achieve that in case that is the preferred option ('helicopter money') or if you don't want the deep state leveraging any spending to it's own benefit, more discretionary programs at local and state level usually are more beneficial than more money for the MIC or Wall St.

But don't give shit to the retarded red states, about time they live the consequences of their own ideas (hard money, balanced budgets) and stop living above their means with transfers from the 'profligate' states... /sarc