August 1, 2011

Takeaways From the Budget Deal: Recovery?—Searching for Alpha for August 2011

If global confidence in U.S. is restored, and earnings remain strong, the economic recovery should get back on track

With the budget crisis all but averted (following an agreement reached on Sunday, and pending House and Senate votes today), some reflection on the last few weeks' legislative action (or inaction) is in order.

  • Few things bring discomfort and mistrust than waiting until the last possible moment to solve a problem.  Analysts were discussing the debt ceiling issue in January.  Stating that the U.S. has become so bipartisan that it cannot legislate itself is clearly stretching, but an issue of this magnitude should have gotten some attention before the ninth inning.

  • Now that the legislative arm has averted a default, and the Fed has done a pretty good job of fixing bank balance sheets, it is time to help the consumer.  Some sort of mortgage relief seems to be the best way to go about helping the middle class get on more stable footing.

  • If global confidence in U.S. debt can be regained, and if corporate earnings continue to be robust, the recovery should get back on track.  I expect GDP to be a bit more robust in the second half of the year after a slow H1.  One should also expect an uptick in rates near the end of 2011.

(click here to enlarge chart)

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