The US is turning into Italy – that’s great news for markets

A useless government and a central bank prepared to do 'whatever it takes' hasn't done Italian stocks any harm. And the same could be true for the US.


America is back in business - for now.

Well, that's the US debt ceiling drama over for another few months.

US politicians came to "an eleventh hour deal" last night, "ending three weeks of high drama on Capitol Hill", as the FT put it.

Markets surged at first. Then investors seemed to remember that no one had really priced in a US default in the first place, so started to dip back down again.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So where does this leave the US?

The short answer is looking forward to lots more money printing

The US re-opens at least until the New Year

That's bad news for the squirrels in the White House garden (apparently they've had a great time eating all the rotting veg after the gardeners had to down tools). But at least the grass around the nation's monuments will get a good trim.

Americans shouldn't get too used to the idea of having a functioning government though.

The deal agreed between the Republicans and the Democrats last night only keeps the government open until 15 January. Meanwhile, the debt ceiling has effectively been raised until 7 February.

It's very hard to see what all of this fuss has been in aid of. The Republicans didn't get much out of it no real concessions on Barack Obama's healthcare laws.

As far as discussing the nation's finances goes, a commission of politicians is meant to be coming up with some new ideas for long-term deficit reduction. But as soon as you hear the words political commission', you know you can switch off whatever comes next is just a waste of time.

So it's equally hard to see this as being the end of America's political paralysis. It's very much a temporary solution.

And while the shutting down of the government hasn't exactly had a catastrophic impact on the country, it has inflicted some cost. At the end of the day, if people aren't get paid, then they aren't spending money.

You can argue the toss about whether it's money well-spent, but it certainly has a short-term impact on the economy. Credit rating agency Standard & Poor's reckons that the shutdown has "shaved at least 0.6% off annualized fourth-quarter GDP growth".

It all sounds a bit depressing really. An ungovernable country. The damage to public confidence. Economic growth under threat.

But investors shouldn't be worried. Because all of that spells one thing: more money-printing.

Is this Europe or the US we're talking about here?

Then in May, Fed chief Ben Bernanke hinted that maybe just maybe - if the US economy was looking a bit healthier, then it might be a reasonable idea to stop pumping money into it quite as vigorously.

After all, quantitative easing (QE) was meant to be an emergency solution to a generational credit crisis. It's not really meant to be standard everyday policy for a central bank to be buying up huge portions of its own government's debt.

Of course, the markets swooned. Less QE? How would we all cope? Investors then spent the next five months bracing themselves for Bernanke to cut his printing back from $85bn a month to maybe $75bn a month in September.

But he didn't. He bottled it.

And now that we've gone through this whole political circus, it's pretty clear that Bernanke has every excuse he needs to not bother tapering at all. And his replacement, Janet Yellen, won't be in a hurry either.

After all, we're going to see more of this nonsense very early next year. As one analyst said to the FT this morning, this deal "takes the Fed out of a taper through to next March and maybe April."

So on the one hand, you have an utterly useless government. But on the other hand, you have a central bank that's most definitely prepared to do whatever it takes'.

You only have to look at the eurozone to see what that combination means for markets. The US might be turning into Italy politically but the Italian stock market has been a cracking bet ever since the European Central Bank said that it was ready and willing to act.

In short, the one thing that the market was really worried about earlier this year a reduction in QE from the US now seems to be off the table until next year.

You just need to look at the jump in the price of gold this morning to see what the market thinks of that more dollar-printing, equals a higher gold price.

So what should you invest in? As my colleague Ed has noted already, the US market itself looks expensive. But there are still plenty of cheap markets out there, which will benefit from a general recovery in risk appetite. And if you'd like to get exposure to US stocks, Ed suggested some to keep an eye on in a Money Morning last week.

How to win at auctions

Stagnant wages? Not for these guys

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.