Squawk Morning Briefing: The Austrians Are Coming

With the U. S. House of Representatives having passed a debt ceiling increase and the Senate poised to follow suit, it looks like the debt ceiling issue (but not the debt issue) may be behind us.  There may be some reaction to final passage, but once that’s out of the way, traders’ attention will likely turn to Friday’s BLS report and the reports which lead up to it.   Jobs remain key to the economy.

Nothing in the recently passed legislation will impact the upcoming report, but the job situation long into the future will be impacted by government debt reduction activities.   When providing stimulus, recent debates have centered on tax cuts vs. spending increases and the philosophical debate about which will provide greater benefit to the economy.

The supply-side, tax cut argument suggests that suggests that lower costs for the companies that supply goods and services will induce them to expand and then indirectly also stimulate demand.  This eventually would grow the overall economy.   The Keynsian argument in favor of increased government spending suggests that any money put out into the economy will foster some growth.

We don’t want to wade into that argument as the reality is likely more subtle.  There are good tax cuts and bad tax cuts just like there is good spending and bad spending.   When either approach is taken to extremes (i.e. too much cutting of taxes or too much spending) so that the government is taking in too little money on a sustained and ongoing basis then deficits get out of control, just like they are now.

Just as we won’t weigh into the debate about which approach does the most good for an economy in providing stimulus, we won’t take a side on the least damaging approach when trying to reduce deficits.   However, it would be folly to assume that neither approach will do damage.   Any attempt to remove money from an economic system will cause it to contract whether from increased taxes or from reduced spending.

So going forward we need to keep our eyes peeled for the long-term impact of these changes.  Our Elliott wave counts suggest that a return to a downtrend in U. S. equity markets is forthcoming.   While there is some short-term ambiguity as to whether a high is already in or whether another new high needs to be struck, the larger picture is consistent with the moves that government is taking and the expected impact.

Our videos continue to focus on helping identify when we can be confident that the move down has begun.  Whether it comes now or later we do expect it.  Legislators are rejecting both the supply side and Keynsian view when approaching the jobs problem and instead embracing the Austrian view.  That suggests the way to improve the economy is austerity and taking our lumps.  Of course taking our lumps means things will be quite bad before they get better.

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Elliott Squawk delivers thorough market preparation every morning in time to take action during the trading day. By combining up-to-the-minute futures activity with traditional end-of-day analysis from cash indices, you receive analysis based on the latest conditions as the trading day sets to open. Each issue of Elliott Squawk goes beyond traditional Elliott Wave analysis because we recognize that trading Elliott Waves is much more than just looking at the most likely current count. Squawk will prepare traders to assess the market action as it unfolds by answering questions that any Elliott Wave trader should consider:

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