As we write, it has been reported that President Obama
has rejected the GOP proposal for a 6-week debt limit extension if it does not
also re-open the government. The House
could vote on the Republican proposal by Friday, although it is far from clear
that it would pass. It not only faces
substantial Tea Party opposition, but Democrats would not vote for the plan as
well since it does not end the government shutdown. However, more negotiations are set, and the
situation is fluid. Circumstances may
change by the time you read this comment.
However, even if a 6-week extension is finally agreed to by both sides,
there is little reason to think that a deal can be worked out in the next six
weeks, and it is likely that another crisis will follow.
Today’s strong market rally seems to us to be based on
false hope and wishful thinking. After
years of sharp disagreement, it appears highly improbable that a deal can be
worked out under the pressure of six-week timeframe. If anything, the two parties seem further
apart than they were a year ago when neither the budget super committee nor
various congressional working groups were able to hammer out an agreement. The result was the sequester that still
continues to put a damper on economic growth.
The stock market and the economy, therefore, will probably continue to
be under pressure for some time to come.