Eye on the Market, July 25, 2011
[{"sender": "US GIO [us.gio@jpmorgan.com]", "recipients": ["Undisclosed recipients"], "timestamp": "7/25/2011 4:33:45 PM", "subject": "Eye on the Market, July 25, 2011", "body": "Eye on the Market, July 25, 2011 (the attached PDF document is much easier to read)\nTopics: US debt ceiling negotiations, a more ambitious European bailout plan (finally), and how large cap growth\nstocks and rising corporate profits are patiently waiting for both of them to end\n\nWhite Castle. Twenty five years ago, I had a friend with a peculiar way of responding to seeing things he didn’t like on\nTV: he would throw White Castle hamburgers at the screen. I always thought this was a bad way to waste a good\nhamburger, but I had one of those moments the other night when watching news reports on debt ceiling\n\ndiscussions. Media outlets have referred to President Reagan’s scolding of Congressional Republicans for delaying debt\nceiling increases, and the 18 increases that took place during his Presidency. The implication: reservations about raising\nthe debt ceiling are as irresponsible now as they were then. This is a disingenuous argument; in the 1980’s, the debt\nceiling being debated was 50% of GDP, and had no bearing on the solvency of the United States. Today, the\nproposed increase raises the debt limit twice as high, measured relative to GDP or government revenues. While a default\nis a very bad idea (deserving of a White Castle hurling of its own), unconstrained debt growth with no plan to slow it is\nbad as well. Some suggest we not worry about debt growth, since demand from foreign central banks and the Federal\nReserve would keep yields in check. That logic is irresponsible at best. Debt limit legislation is a rocky but healthy way\nfor a democracy to decide whether mega-deficits are in the long-term public interest.\n\nOver the last few days, the Gang of Six plan, the Reid-McConnell plan and the Obama-Boehner plan have all been\nraised up the flagpole and then lowered. By the end of the process, we’re still looking for deficit reduction of $3\ntrillion+ over 10 years (relative to the CBO Alternative case in which there is no deficit reduction at all). However,\nCongress is running short on time, and may have to do a smaller debt ceiling increase/deficit reduction first. For now,\nwe wait to see the balance of spending cuts and revenue increases will be agreed to. Last week’s Profiles in Courage\npiece walked through the history and dynamics of this process, so we won’t repeat that here. Here’s our take on what\nhas been proposed so far, with the caveat that many plans are not crystal clear what baseline they are using, or what\nsteps they recommend to get to that baseline first. For example: the Gang of Six state that they used the President’s\nbudget as a baseline (scored by CBO in March 2011), reduced deficits by $3.7 trillion, and ended up with a 71%\ndebt/GDP ratio; but they do not explain how they get to the President’s baseline in the first place."}]