Get Ready. A New Race Is About to Begin?

US Senate scrambles to get the job done in time. There are still challenges apparently, to speeding up the process, With some amendments potentially delaying the passage of the bill beyond the crucial deadline.

You cannot get any more last minute and just in time than this.

The most likely scenario is probably the Bill will make it into law literally at the very last minute. Stocks will leap with joy and then crash.

This is the scenario I am mapping out. Given the environment of an on-going crash in manufacturing and the banking sector. US Manufacturing PMI came in yesterday at just 46.9. It is the 7th month in a row that US manufacturing has been in contraction and is again at Covid-lockdown levels of activity.

Everyone keeps wanting to look the other way. That is, away from the real economy.

Preferring to dizzy themselves in their lofty ivory tower offices above the cloud line. Having an office above the cloud line, is now a highly sort after location by Wall Streeters, and most US economists. As it allows the full freedom of pretending down there in the real world on Main Street no longer exists. To some extent this is true of course. There is a very real separation taking place in the US society and economy. Fractured politically, the wealth gap is now at a societal breaking point.

This matters regarding one’s assessment of what stocks will do. As the big funds live above the cloud line and are awash with government stimulus, the still strong impetus from previous near-zero rates for too long, and a steady inflow of funds that they have to invest somewhere.

It is true, that even in a clear bear market, where big funds are negative on stocks, only privately behind closed doors of course, they will still buy some stocks at least. This is because this is what they get paid for. To simply buy stocks and bonds every month and wash their hands of the outcome. Which appears to have no impact on their skyrocketing wealth.

What we have then, in terms of territory in assessing where stocks will go from here, is in fact a relatively clear equation. Well, a see-saw really. Where the relative weightings will of course determine who goes up and who goes down.

This is the equation:

On the buy side:

Massive US debt spending providing excess liquidity.Government guarantees of the big banks.Capital inflows (usually) to the big funds.Corporate share buybacks (ensuring executive bonuses).Versus

On the sell side:

Manufacturing in deep recession with no prospect of a return to growth.Declining property prices in major cities.Potential Commercial property crisis.Quietly intensifying Banking crisis.Debt ceiling crisis only rolled out for 2 years with no real positives for the economy.Rapidly decelerating economic growth.Tighter credit generally.Extreme inflation that is eating away at the foundations of the economy every day.Fed Funds Rate likely to remain at current level or higher.It is quite straight forward really.

Too much money above the Wall Street cloud line.

V. The reality on Main Street.

By the way, I am not suggesting here that the latter, the sell side will definitely triumph. There are many occasions where equity markets defy the laws of physics and just rally regardless. This could very well be the case here.

Still, it is worth considering all the issues stacked along the see-saw at this moment. For with the miraculous passing of an increase in the debt ceiling, and after the initial relief, it will be time for all the money managers of the world to take another look and do a quick assessment refresh.

There is no doubt the money will be there to drive a renewed major rally. However, it is also possible, given the mountain of cautionary evidence, there will be enough money managers who say wait a moment, nothing has really changed. In fact, things are still getting worse. Do I really need to keep buying more stock than I already have?

A lot of people are long the equity market already, in expectation of windfall profits when the debt ceiling is finally raised. Some, even still believe there will be rate cuts, which was always a good joke. The first is possible. The second not.

This is why, I suspect, given all the other factors, we should all be aware of the very real risk of a rally on the lifting of the debt ceiling, that may end in a crash.

Clifford BennettACY Securities Chief Economist

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