The global economy is undergoing a period of great upheaval and that even fewer will profit from, because they are caught up in looking at the world through past experience.
Unless an 11th-hour deal is reached, sequestration kicks in on Friday, March 1.
Of course neither side is motivated to solve the problem simply because both sides consider themselves politically immune to the fallout, as long as they can turn the issue to their own political advantage.
What’s most ironic is that even if budget cuts take place as scheduled, it won’t even make a dent in the federal deficit.
The $85 billion in spending cuts to defense and domestic programs amounts to just 2.4 percent of the federal budget, which was $3.538 trillion last fiscal year. Even after sequestration, Washington will still be running annual red ink of close to $1 trillion. Some would point out that the GDP was up for the first time in five years. But when you look at the numbers, it is only 0.01%.
With such political folly, it’s no wonder investors are beginning to lose confidence in the sustainability of the stock market’s uptrend. Of course, partisan politics isn’t the only worry on the horizon.
Gasoline prices at the pump have risen for 36 straight days. In fact, retail gasoline has risen almost 15 percent so far this year, which amounts to an additional tax of about $35 billion on American consumers.
Adding the economic drag of higher fuel prices to the payroll tax hike early this year, the pending sequestration, and escalating political risks in Europe … you have a recipe for higher market volatility ahead.
Although markets were initially spooked last week by talk that the Federal Reserve could prematurely end QE-infinity, the Fed has no intention of reversing its easy-money policy anytime soon.
Right now, the S&P 500 Index is overbought. Longer term, markets will remain propped-up by global money printing, and by capital flowing into equities, commodities and other assets that offer higher returns.