The “Risk Off” Trade Gets Real

jump off the cliff

The “risk off” trade got real today as risk assets took a hit in light of the U.S. government reaching its credit card limit, ongoing problems in Europe and weak economic reports.

Today was a milestone in our ongoing economic saga as the Treasury Secretary was forced to freeze (rob) federal pensions to cover the country’s debt obligations as we’ve maxed out our national credit card and now robbing Peter to pay Paul, which, of course, can only go on for a limited time until you run out of pockets to pick.

This path will buy us some time until August when the U.S. would default on its debt and trigger a global financial catastrophe.  No one believes that this will happen, however, Republicans and Democrats are digging in for a tough fight over big issues like Medicare (Vote Republican, End Medicare) as a Democratic slogan suggests and even Republicans can’t agree amongst themselves about how to proceed and continue to filibuster any form of revenue increases (tax hikes)

At the front of the Republican offensive stands Representative Paul Ryan who addressed the Economic Club of Chicago today and said:

“This crisis has been decades in the making. Republican administrations, including the last one, have failed to control spending. Democratic administrations, including the present one, have not been honest about the cost of the tax burden required to fund their expansive vision of government. And Congresses controlled by both parties have failed to confront our growing entitlement crisis. There is plenty of blame to go around.

Years of ignoring the drivers of our debt have left our nation’s finances in dismal shape. In the coming years, our debt is projected to grow to more than three times the size of our entire economy.

This trajectory is catastrophic. By the end of the decade, we will be spending 20 per cent of our tax revenue simply paying interest on the debt – and that’s according to optimistic projections. If ratings agencies such as S&P move from downgrading our outlook to downgrading our credit, then interest rates will rise even higher, and debt service will cost trillions more.

This course is not sustainable. That isn’t an opinion; it’s a mathematical certainty. If we continue down our current path, we are walking right into the most preventable crisis in our nation’s history.

So the question is, how do we avoid it?

The answer is simple. We have to make responsible choices today, so that our children don’t have to make painful choices tomorrow.

If you look at what’s driving our debt, the explosive growth in spending is the result of health care costs spiraling out of control.

By the time my children are raising families of their own, literally every dollar we raise in revenue will be paying for three major entitlement programs.”  Paul Ryan

Overseas, the IMF reels from its problems surrounding Strauss-Kahn and Greece continues to be a major source of friction.

At home, Hewlett Packard’s internal memo said to prepare for “another tough quarter” and will release its earnings a day ahead of schedule on Tuesday, a day earlier than expected.

At Wall Street Sector Selector, we had a nice day with our defensive positions and expect lower prices ahead.

Daily Moves for Major ETFs:
Dow Jones Industrials: (NYSEArca: DIA)               -0.4%
Russell 2000: (NYSEArca: IWM)                            -1.46%
NASDAQ 100: (NasdaqGM: QQQ)                         -1.73%
S&P 500 Index: (NYSEArca: SPY)                         -0.63%
MSCI Emerging Markets:(NYSEArca: EEM)           -0.15%
MSCI China (NYSEArca: FXI)                                 -0.27%
Gold (NYSEArca: GLD)                                           -0.18%

Disclsoure: Wall Street Sector Selector actively trades a wide range of ETFs and positions can change at any time.