US debt ceiling: is there a long-term solution?
US debt ceiling still impacting markets and currencies.
Thankfully politicians in the US can at least agree on one thing – that America defaulting on its obligations would be a “bad thing”.
And so it was recently at the eleventh hour that an agreement was struck to simultaneously suspend the debt ceiling and reopen the US government. All it took was a sixteen day circus and a glimpse over the abyss but all was finally resolved, at least until early 2014.
While the news has since put the bulls back in charge, the outcome is far from optimal and a long way from a sustainable fiscal solution. But not to worry. Part of the arrangement that helped solve the impasse was the formation of yet another budgetary committee tasked with doing what hasn’t been possible so far, agreement on a long term budget deal.
Perhaps the opposing sides could learn from opinion polls and share the bipartisan call for co-operation but if history is any guide this seems unlikely. Either way, we’ll find out in mid-December if there is any common ground. Otherwise it’s another shutdown in January and another debt ceiling debacle set for February 2014.
The situation is all the more frustrating as the US economy seemed poised to accelerate and while the extent of the damage has yet to be quantified there’s little doubt the shenanigans have undermined business and consumer confidence.
Taper your expectations
Like the general public the Fed too has been similarly unimpressed. Rather than dialling down QE the Fed is still going full throttle on asset purchases with taper possibly off the table until 2014. Of course the ripple effects are not confined to the US either.
While the ongoing liquidity is supportive for asset markets, there has also been a sting in the tail on the Australian economy. Coupled with a mildly better China, the Australian Dollar has surged on the belief that QE will be around for a little while yet.
A higher Aussie Dollar makes it harder to rebalance “the growth sources of the economy”. The RBA is surely gnashing its teeth.
Drive your dollar further
From a longer-term perspective, the Australian Dollar remains near historical highs and still provides attractive purchasing power so it is a little surprising that many local investors shy away from global shares. For those worried about the transition taking place in the domestic economy, investors could look offshore to companies benefitting from long term change such as the digital disruption.
We were recently reminded of the dominance of Google in search, advertising and content. With strong growth in mobile, the company delivered results ahead of expectations and put a rocket under the share price moving it past $1,000 for the first time. Not a bad outcome for anyone who bought at the IPO in 2004 for just $85. With audiences continuing to shift to tablets and smartphones, advertisers will be compelled to go with them placing Google in an enviable position.
Indeed some 40% of traffic to YouTube now comes via mobile. A perfect way to stay in touch on the debt ceiling and other dysfunctional debates on Capitol Hill over the coming months.
By Pat Noble, Senior Investment Specialist, Zurich Financial Services Australia Limited
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