Political Resolution is Very Bullish
July 19, 2011
David R. Kotok


The Senate Gang of Six has presented a plan to settle the American debt ceiling debate. The market reacted positively, with a rally in both stocks and bonds.

Released tonight, the polling results from the Wall St. Journal help explain the political shift that will now get this done. 38% of Americans say the debt ceiling should be raised; a month ago this was 28%. 31% say don’t raise it; a month ago this was 39%. 58% of the thousand people polled now support Obama’s approach.

Markets are assuming this Senate announcement will be the catalyst to bring a resolution to the very divisive federal politics we have been witnessing in the government of the United States. We agree.

We expect the market rally to carry to new recovery highs. This expectation assumes a debt ceiling resolution is completed before the August 2 deadline.

We also expect that the European leadership will find a construction by which they, too, will bring their high uncertainty to some settlement. That may come this week.

The euro-based markets and the dollar-based markets are the two largest capital markets of the world. We estimate their size by adding the total values of the stock markets and bond markets tied to those two currencies. Our data sources are the Bank for International Settlements (BIS) and the World Federation of Stock Exchanges. We track their data as it is released.

The issues of sovereign-debt creditworthiness, budget austerity, and deficit financing have been hanging like a pall over these two largest global capital markets. It appears that the crisis in the euro zone and the dollar zone became sufficiently intense that political leadership in both zones are stepping up and concluding action. Those leaders are forced to do so by market vigilantes.

We believe that lifting these massive uncertainties from these two largest capital markets will act as a huge catalyst for the upward movement of financial assets. These events of political resolution are very bullish.

We remain fully invested.

David R. Kotok, Chairman and Chief Investment Officer

Category: Credit, Politics, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Political Resolution is Very Bullish”

  1. theexpertisin says:

    The key takeaway is “We remain fully invested.”

    Taking a mature view of placing one’s wealth in quality securities diversified worldwide for the long term without succumbing to the vagaries of the moment, within reason, is what separates investors like Kotok from speculators.

  2. G3 says:

    This is standard kick the can down the road solution. It is not even a solution.

    To call Europe bailout and U. S. debt ceiling backdoor deal without serious spending cut reasons for new market high demonstrates the lack of critical thinking from the author.

  3. lalaland says:

    Me being nobody, I’d argue that your confidence in America is well placed, since the President and McConnell/Reid/Gang of 6 have steered the conversation towards something politically and economically feasible. I’m fairly certain what the gang of 6 have proposed involves cuts over a much longer curve than the Austerity measures underway in Europe, so the short term impact should be minimal.

    I’d argue Europe is heading the opposite direction though, with no politicians using their bully pulpits to steer their electorate towards being comfortable with what needs to be done (or at least providing cover for those opposed) and Austerity is in full swing, which has been/will be disastrous for their economies. I think they are in a much tougher position for reasons both within and beyond their control (more like the bitter pill we swallowed with TARP 3 years back).

  4. socaljoe says:

    Why would US treasury bonds rally on the expectation that the US will be going deeper into debt?

  5. inthewoods says:

    I don’t necessarily agree here just because the House has shown no willingness to accept any form of compromise. As long as the House Repubicans remain a separate group under Eric Cantor’s lead, Boehner will not be able to bring in his votes. So while the Senate may see a compromise, I don’t see how it happens in the House.