With expectations for political gridlock dwarfing those for a fiscal truce, the chance of seeing resolution of the debt, deficit, payroll taxes or unemployment benefits anytime soon is arguably slim, at best.
"Everyone is hoping that at some point cooler, smarter heads will prevail but I really don't see any signs of that," says Michael Strauss, chief investment strategist and chief economist at Commonfund.
Instead, he thinks the markets will take action against America's passivity long before our elected leaders do.
"I think you will see some auctions the will be difficult for the Treasury to underwrite next year," Strauss says in the attached video, and points to what happened to Germany last week (and they're in much better shape than we are).
While some will point to last summer's downgrade by Standard & Poor's of the U.S.'s AAA credit rating and the fact it triggered a fear-based flight into the very assets that had just tripped the alarm in the first place, it is not too much a stretch to suggest that 0.9% for a 5-year Treasury note may not always be adequate reward for the risk.
"The danger is that since the U.S. is highly dependent on foreign flows, and rates are at historical lows, at some point the foreign (investors) may say 'enough is enough (like the poorly received German auction) I don't want to buy this debt,'" says Strauss.
For now, investors are keeping busy by studying trends in the rate of auction over-subscription. But it might only take one bad auction to set this locomotive rolling.
Until then, Strauss feels like the 700 basis point (7%) yield pick up you get on short term junk bonds versus Treasuries is worth a look, and that longer term (2 to 4 years), equities also offer better value than our government bonds.
It's a stance held by many strategists these days, that so far has not migrated abroad and crimped demand for U.S. debt. But when it does, you will surely hear about it.
In the meantime, in what could be seen as a futile wish given the current budgetary stalemate in Washington, Strauss says he thinks a spending cut-to-tax increase ratio of 4:1 or even 8:1 would be a good place to start to break the cycle of government ineptitude.
124 comments