Markets climb walls of worry and doubt because investors sit on the sidelines in disbelief after a significant bottom. Uncertainty often creates great opportunities for savvy investors who know their fundamentals.
But sometimes you can have too much uncertainty. Too many variables and unknowns mean too many ways for things to potentially go wrong. And this puts a risk premium into the stock market that wasn't there before -- and this on top of the European financial crisis.
Today I quickly offer a laundry list of US "political" problems that combined could create too much uncertainty for large asset managers to buy the S&P at a historically cheap 12X current year projected earnings.
Some of these are of small consequence by themselves. The top 2 obviously carry the big weight. But all you have to do is throw a bunch of Congressional brinkmanship with regulation at markets and they will recoil. For investors worried about this year's performance, better to sit tight until you know exactly what's behind those storm clouds.
And I am no expert on Washington politics or markets regulation as they effect Wall Street. This is just one trader's observation of what "too much to compute" looks like right now. After you read it, we'll take a look at the Federal debt picture in the year 2035.
9 US Political Bricks in the Wall of Worry
1) Fiscal cliff
2) Presidential election (yes, typically good for markets, but there's a lot riding on this one given the "cliff")
3) Dividend tax hike
4) Volcker Rule regulation heat turned up after JPM $4 billion loss
5) Dodd-Frank angst and confusion (Tim Geithner challenges whiny bankers, "Tell me what your specific
6) High-frequency trading and exchange scrutiny after BATS and Nasdaq Faceflop debacles
7) Private Equity scrutiny/sentiment in light of Romney-Bain (Joseph Stiglitz is talking about reforms here I believe)
8) Fannie Mae & Freddie Mac reforms that might impact mortgage market negatively
9) Wall Street compensation and corporate profits soaring while unemployment at 8% (Will Obama take another shot at the Street, whether he wins or loses?)
Bottom line: Uncertainty = Opportunity. But LOTS of Uncertainty = Too Many Ways for Things to Go Wrong
Sumo Size Debt
Finally, there is the Congressional Budget Office report released this week. Their "Long-Term Budget Outlook" has an eye-opening graphic of potential Federal debt obligations.
The CBO's "Extended Alternative Fiscal Scenario" is based on their assessment of the "explosive path of federal debt." That path could eventually lead to Japan's "sumo size" debt of 200% of GDP. And here is the CBO logic about, essentially, "if things stay the same."
I tend to share the views of an economist like Larry Summers who says we need to borrow and spend now to stimulate our economy and "term out" our debt while interest rates are so fantastically low. We can grow AND pay down our debt if done smartly.
The question is, can our political leaders figure out how to do this without derailing the economy in the short-run? If they can't, we may end up with an economy that can't grow it's way out of debt no matter how much more stimulus we throw at it.
Kevin Cook is a Senior Stock Strategist with
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