The US Budget Deal - Some ThoughtsThe "Deal" in terms of news reporting is very vague right now as just the broad parameters have been laid out.
The initial market reaction is likely to be positive due to relief that a possible default on the debt has been avoided. The market reaction could be muted since the market seems to have assumed that some sort of deal would be inked at the last minute. This raises the question as to how much the positive reaction will be. We will find out on Tuesday when the US market open again. The big winners are likely those that had the nerve to buy those 30 day Treasury Bills at a deep discount to face value. The bond guys win again (lol).
The next key thing to happen will be a "scoring" of the deal by the Congressional Budget Office (CBO). This "scoring" will look out 10 years based on the details in the deal and project Government expenditure and revenue and the resulting fiscal deficits each year. I have saved the current forecast and will look with great interest at the delta when they release the new projection. It will be at this time that we will likely see another reaction to the deal. I encourage others here to do the same and draw your own conclusions.
With that as background, here are my initial thoughts....
1....both sides got a piece they needed in terms of their political backers. The Republicans got military spending protected and avoided increased taxes on corporations and the wealthy. The Democrats essentially protected the "Green New Deal" and signature items such as student loan foregiveness and entitlement programs such as medicare and Social security were untouched. Don't forget that Defence + entitilements+interest on the debt = total government revenue. So everything else is done with borrowed money.
2...the deal is essentially a win for Biden and for all intents and purposes doesn't significantly change the trajectory of his trillion dollar spending programs. The cuts agreed to are small and at the margins and have virtually no real impact on future fiscal deficits.
3...I suspect that the Republican "win" on eliminating increased taxation on corporations will be a positive for the market but the offset to this is that it will actually increase the annual budgetary deficit which will not be a good thing for markets over the longer run.
4...the longer run decision for the market will be whether the stability that there won't be a debt crisis for about 2 years plus no increase in corporation taxes is more important than the fact that the US deficit will continue to grow in excess of a trillion dollars a year and may in fact be higher than the current trajectory.
5....there were words about streamlining the approval process for major energy projects but it is hard for me to imagine that any of that will result in a substantive difference in terms of more energy production in the US.
6...the combination of all of the above suggests that the Government fiscal position is still inflationary and will continue to put pressure on the Fed to, at a minimum, keep interest rates high and possibly be forced to increase them higher in order to achieve the target 2% inflation rate. This in turn sets the table for a recession in the near term.
My bottom line?
This deal hasn't really changed anything or addressed the systemic problems facing the US and if anything made things worse. So based on this, my strategy and underlying planning assumptions remain unchanged. If more data comes out from the CBO that my 'scoring" was significantly wrong then I will revamp my underlying assumptions accordingly.
So if there is a significant positive market reaction to the deal, I expect to be selling into it.