Breaching the Glass Debt Ceiling

As I predicted 2 months ago, cooler heads would ultimately prevail and the debt ceiling will be raised before the deadline is reached. We are, at last, seeing indications that a debt ceiling compromise is in the works.

We are not out of the woods yet. As I predicted, the debt ceiling showdown has played out like a hardcore suspense movie that keeps people at the edge of their seats, and that the suspense will make many people in high places very nervous. In the weeks following the start of the showdown, the US Chamber of Commerce and the banks have been furiously lobbying to get the debt ceiling raised.

We have seen more signs of people in high places getting nervous. First, Timothy Geithner has been warning that we are running out of time on the debt. Second, credit rating agencies have been hinting that they may downgrade the rating on US credit, even in the event of a debt ceiling deal. Third, President Obama warned that there is no guarantee that Social Security checks will be delivered if a debt default occurs.

We are already seeing clear indications that the game of chicken is going to end before the month comes to a close, as Sen. Mitch McConnell has shown signs of willingness to make concessions.

Social mood will likely determine when a debt ceiling compromise will get hammered out. Although the next leg down in social mood has already commenced, the trend is still in its infancy. Although the political arena is polarized, there is still a reluctant willingness to compromise as there is still a lot of optimism.

Here is a short term chart of the DJIA, which is the "mood meter" of the United States population.

Even as hints of a coming debt ceiling deal are now emerging, there is still a lot of tension in the political arena. Expect the political drama to last for another week or so with Rep. John Boehner and Rep. Eric Cantor continuing to treat the debt ceiling as a political football. Afterwards, we will see one last blow-off rally. It is very likely that the debt ceiling will be raised sometime between July 25 and July 29. It's hard to say whether we will get a clean debt ceiling bill signed into law. The most likely scenario is that both the GOP and the Democrats will end up making significant concessions to get the debt ceiling raised, which is consistent with a reluctant willingness to compromise.

The ironic thing is that after the debt ceiling gets raised, the DJIA is expected to take a hard plunge and the next leg up in the US Dollar Index is expected to commence. Here is the intermediate term chart of the DJIA.

On the longer term, the United States will not default on its debt this year. There is no doubt that nervousness over the debt ceiling will continue to build on the short term as we get closer to the deadline. A debt default will eventually occur, but it will be due to rising interest rates making the existing debt burden too heavy to bear. We are looking at 2013 or 2014 as when the United States will default on its debt.

Too Big to Bail Out

Debt fault lines continue to spread and grow in Europe. Although most of the focus continues to be on Greece even after the second bailout was completed, there are many other nations in Europe that are facing a debt crisis of their own.

Greece, Portugal, Spain, Ireland, and Italy are already quite deep into Primary wave [3] down in terms of social mood. In Greece, Primary wave [3] down has been unfolding for over a year, and yet, it is still in its early stages as optimism about future economic prospects are still present. In the coming months and years, "too big to fail" is going to be replaced by "too big to bail out" as larger nations start to fold under the increasing weight of their debt burdens.

Recently, Spain and Italy are under increased financial stress from their debt crisis and will need a bailout in the near future. Analysts are now warning that Italy is following the same path as Greece. There are already fault lines taking hold in the UK as well, and protests erupted last month when the government attempted to implement austerity measures which made changes to pensions and raised the retirement age. The magnitude of the labor and work strikes that unfolded in the UK last month is indicative of the degree of the bear market, considering that we are still in the early stage of the bear market.

As I indicated 2 months ago, bailing out a small nation isn't much of a deal, but bailing out a large nation is far more difficult, if not impossible. Spain, Italy, and UK are all too big to bail out, which is why a default in Europe, followed by debt contagion, is inevitable. The most likely scenario is for the UK to default on its debt, most likely in the next several months, creating a global ripple effect. The chain reaction would commence and within the next six months, Greece, Spain, Portugal, Ireland, and Italy would all default on their debts. A debt default by Italy would also create a global ripple effect.

The fault lines are on the verge of going critical, and some economists are starting to recognize the implications. A cascade of debt defaults in Europe would indeed be a defining characteristic of the first half of Primary wave [3] down (2011 - 2013) in the DJIA, the FTSE 100, the DAX, and the CAC 40. A cascade of debt defaults in Europe could possibly result in the breakup of the European Union either in October 2013 (the center of Primary wave [3] down) or 2019 (the center of Primary wave [5] down), and the abolishment of the euro.

Rising Tide of Xenophobia

A social trend that has been unfolding since April 2010 has been a rising tide of xenophobia at the state level in the United States. Xenophobia is generally characteristic of bear markets of Cycle degree or larger as a bearish social mood results in smaller social units and increased friction between social units. Bear markets also result in increased protectionism in which groups of people based on common characteristics such as race, religion, gender, economic status shut other groups out.

The trend started with Arizona passing an immigration bill, SB 1070, in April 2010. The immigration law drew criticism nationwide due to the possibility of "racial profiling". Massive protests erupted for a number of weeks leading up to the signing of the bill into law, and for a number of weeks afterward. The Obama Administration expressed its disapproval with the law and the US Justice Department sued to block the new law.

The trend accelerated in February 2011 and it continues today. In February 2011, Indiana became the second state to pass tougher immigration laws. This was followed by Utah in March 2011, and then Georgia and Alabama a few months later. In all of the cases, the passing of the immigration laws resulted in massive protests in which people took to the streets.

So far, the rising tide of xenophobia has been kept in check to a large degree as federal judges have blocked all or part of the immigration laws in Utah, Indiana, Georgia, and Arizona. At the federal level, there is still a limited level of openness towards immigrants as evidenced by repeated efforts by the Obama Administration to get the DREAM act passed into law. Considering that we are still near the peak of a Primary degree bear market rally, a limited level of openness would still be evident.

As the next leg down, Primary wave [3] down, commences, expect the tide of xenophobia to accelerate over time, and the rising tide will eventually become too much for the groups such as the ACLU to overcome. Expect the DREAM act to get scrapped in the near future, especially if Michele Bachmann wins the presidency in the 2012 presidential election (more on that later). All pretense of openness towards immigration will disappear in the near future as social mood takes its next leg down. The federal government will eventually close the borders in the future, most likely in 2014, and this would happen regardless of who is president at the time (If its Obama, borders get closed to stop the outsourcing of jobs out of the country, if its Bachmann, borders get closed to stop all further immigration into the country).

Bears in Control of Job Market

Today, the latest jobs report showed that the US economy created just 18000 jobs in June 2011. The numbers for May 2011 were revised downward to 25000 jobs from 54000. Taken together in context of the larger picture, we are seeing clear evidence of a trend change in the job market. For all we know, the next leg down may have already started but confirmation won't come until August 2011 at the earliest.

The job market is clearly sliding down the "Slope of Hope" in terms of the larger picture. During June 2011, President Obama downplayed the weak job numbers, attributing it to a "bump in the road".  After the ADP report came out last Wednesday, economists and analysts boosted their expectations from 90000 to 175000 in terms of jobs created in June 2011 and then predicted that hiring would accelerate in the second half of 2011. After the job numbers for June 2011 came out, Obama again attributed the weak numbers as a "bump in the road" and started to blame the debt ceiling showdown, while at the same time, expressed optimism that hiring will accelerate in the next few months. The latest speech is here.

The next leg down in the job market is imminent if it hasn't started already. Earlier, we saw the beginning of the next leg down in the DJIA. The job market is now following suit. Once the next leg down starts, the (United States) economy will wipe out 36 million jobs in the next 5 years. The mechanism is already in place for mass job losses to take place, namely, the fact that businesses and corporations are leveraged to the hilt with credit and debt and rising interest rates will trigger a massive cascade of debt defaults as the existing debt burden becomes too heavy to bear. Even professions that are deemed to be hot (such as health care) will sustain massive job losses as their businesses fold.

Expect Obama to continue to play the "bump in the road" card for a number of months as the job market resumes its decline, and expect the GOP to get more aggressive in their attacks over time. Both Rep. John Boehner and Rep. Eric Cantor wasted no time using the latest job report to attack Obama's economic policies. 

The unemployment rate (U6) is at 16.7% and will soon surpass the highs seen in 2009 (17.5%). The unemployment rate (U6) is projected to rise to 40% by early 2016. Expect weekly jobless claims to surpass the highs seen in 2009, possibly reaching 900,000 or more by early 2016.

A Rocky Road For Pixar

From a socionomic perspective, the rapid decline of Cars 2 is evidence of social mood turning bearish. We have seen sign after sign that we are in a transitional period where family movies are falling out of favor and horror movies are finding unexpected success in theaters.

The correlation between social mood and the success of Disney movies was first discussed in the title The Wave Principle of Human Social Behavior, and there is a write-up on the subject at the Socionomics Institute site as well.

Although many are quick to attribute the rapid decline of Cars 2 to Transformers 3, consider the following:

In 2004, Harry Potter and the Prisoner of Azkaban did not derail Shrek 2.
In 2007, Transformers did not derail Ratatouille.
In 2008, Both Kung Fu Panda and WALL-E continued to do a respectable amount of business after The Dark Knight opened in theaters.
In 2009. Transformers 2 did not derail Up, and Ice Age:Dawn of the Dinosaurs over-performed with good staying power in theaters in spite of coming out in theaters just after Transformers 2 did.

All of the cases listed above reflect the correlation between positive social mood and the success of Disney, Pixar, and Dreamworks, which unfolded regardless of what else was playing in theaters at the time.

In late May 2011, just after the recent top in the DJIA, Kung Fu Panda 2 opened in theaters with disappointing results, with the opening weekend 45% lower than the original in terms of attendance and on track to sell only half as many tickets as the original -- all this in spite of the original having been well received by the movie audience.

Although the outcome of Cars 2 took many people by complete surprise, it was predictable from a socionomic perspective. I had predicted a month before the movie opened that it would have a disappointing performance in theaters. The first sign was the 35% Rotten Tomatoes rating, which was considered unthinkable for a Pixar movie, considering that all Pixar movies through last year scored 95% or better. The second sign was from the opening weekend, which was 25% lower than the original in terms of attendance. The real shocker, though, would be the second weekend drop -- 65% -- an unprecedented collapse for a Pixar movie. Pixar movies are known for their staying power in theaters, but Cars 2 is rapidly losing momentum.

We are in a transitional period. We are already seeing early indications of horror movies finding increased success in theaters, which is characteristic of bear markets of Cycle or larger degree. Earlier this year, the horror movie Insidious performed better than expectations and exhibited surprising staying power in theaters.

With social mood continuing to trend downwards over the next 10 years, we can expect next year's Pixar movie Brave to not just disappoint, but outright bomb.

Government Shutdown in Minnesota

Yesterday, a government shutdown has begun in the state of Minnesota. From a socionomic perspective, a government shutdown is the result of division, discord, and polarization in the political arena. This would indicate that a government shutdown is far more likely to happen during a bear market than during a bull market. Not too long ago, the United States government went on the brink, averting a government shutdown by just 90 minutes.

I would even theorize that the duration of a government shutdown is correlated by the degree of the bear market and where we are in the bear market. Larger bear markets have the potential of producing government shutdowns with a longer duration. For example, Minnesota had a government shutdown in July 2005 that lasted 8 days. There have been a number of government shutdowns at the state level in the last 10 years, such as the New Jersey shutdown in 2006. All of them lasted from a few hours to a few days.

The reason for the short duration of the government shutdowns within the last 10 years is because social mood was trending positive with Cycle wave b up (2003 - 2007) unfolding. Increasing willingness to compromise and increasing ability to reach a consensus in the political arena meant that any government shutdown that unfolded would be brief.

Politics is much more polarized now than it was in 2007. Social mood is going south with increasing momentum as Cycle wave c (2007 - 2021) starts its next leg (Primary wave [3]) down.

Given where we are in the bear market, I am predicting that the government shutdown that is currently in progress in Minnesota will last at least 21 days, with a substantial possibility of lasting a month or more. Another aspect of the development is that both Tim Pawlenty and Rep. Michele Bachmann endorsed the government shutdown, calling it an act of fortitude for the state GOP to stand firm. The shutdown could have a substantial impact on the state's economy, and indeed, 23000 state employees have already been laid off.

In the longer term perspective, the trend of increasing polarization in politics will continue until 2021. The result of increased polarization, of course, will be government shutdowns lasting several months and occurring with greater frequency at both the state level and federal level. A shutdown of the United States government is in the forecast for 2012 with a duration of 4 to 6 months.

The Rise of Secessionism

As we celebrate the 4th of July weekend with fireworks, it is important to recognize that the birth of the United States in 1776 was a result of a secessionist movement in the American colonies and the desire to break away from the British Empire. The declaration of independence was followed by the Revolutionary War.

From a socionomic perspective, secessionism is associated with bear markets (usually Cycle degree or larger). Bear markets are associated with increasing polarization and smaller social units, which eventually result in secessionist movements over time.

The formation of the United States in 1776 was the result of secession from the British Empire, and is associated with Grand Supercycle wave [II].

As the current bear market continues to unfold, secessionist movements are picking up steam. Last month, Pima County got the ball rolling on attempting to secede from Arizona and form a new state. Just today, a group of counties are moving towards secession from California, again with the aim of creating a new state.

There are likely many more fault lines than just the two listed above. The developments of the last couple of years contrasts with the breakup of Virginia to form a new state, West Virginia, just before the Civil War started. The breakup of Virginia occurred in the late stages of a Supercycle degree bear market (Supercycle wave (II)), whereas we are still in the early stages of the current bear market, which has serious implications down the road. The fact that secessionist movements are unfolding in the early stages of the bear market can only mean that the current bear market is of larger degree than the ones that produced the Long Depression and the Great Depression, in other words, the current bear market is Grand Supercycle degree.

As "The Great Deflation" starts unfolding in full force, expect more secessionist movements. One area to watch is the state of Washington as the counties of Eastern Washington already expressed a desire to form a new state with Spokane, WA as the capital back in 1991 during a Primary degree bear market in the S&P 500. This will surely flare up again in the coming years, if not months from now.