You might re-read the July 2nd blog for the definition of a Relief Rally. The world markets have been terrorized (and I do mean terrorized) by linking the debt ceiling with budget negotiations. Now that a deal appears to be in hand, the world markets are rallying strongly. Does this mean it is party time?
No, while there are still lots of details we don't know, it is reported the deal will set up a "committee" of partisan children who will hammer out the actual budget cuts by Thanksgiving. I'm not optimistic about this. As the Simpson-Bowles Commission could not reach agreement, I'm not optimistic that this one can either. This will trigger automatic cuts that are unclear. Rather than cut intelligently, it will be done automatically. For example, Rand Paul would cut everything 1% per year every year for seven years, including Social Security and Medicare. Go tell your grandmother about that!
Also, don't forget there has been two other problems weighing on the markets. First, there was the end of QE2, which expired quietly with other central banks picking up the slack. More importantly, the problem of European sovereign debt remains. We have not heard the conclusion of that one. Stay tuned . . .
(Some analysts argue there is a fourth problem, i.e., that the recent weak economic data suggests another recessionary dip, but I disagree. Recovery from a financial crisis just takes longer than recovery from a normal recession. Bank lending has finally started to rise, albeit minutely.)
So, enjoy the Relief Rally for a few days! Futures indicate the Dow will open up about 160 points. What's not to enjoy . . . for the moment?
