Debt Crisis: A follow-up

Here's a follow up to my thoughts on the debt crisis, a response to a client after I sent him my special report:

I think that the market for the first time {Wednesday} is starting to take in a serious consideration that there might not be a compromise before time runs out on August 2nd. This is why most major averages were down one to two percentage points. This is just part of the external pressure that will begin to build on Washington's political class the closer we get to this date next week. While this may lead to a short term decline and there may be some volatility in the next few weeks regarding this issue, I think that currently markets have priced in some sort of resolution {likely initially leading to a short term raise of the debt ceiling as negotiations continue}.......

I think the real question people could be asking is will the episode surrounding debt lead to a market crash. Frankly that is an unknowable event, although I would suggest that is a lower probability event. While low probability does not mean "cannot occur", I think that given what we know right now this is not how this will likely play out.

Here is what I think is the most likely scenario that will occur on the debt issue. Again remember this is a scenario and not fact: For the reasons that I have outlined in my special report I think that both political parties will wait until the absolute last minute to either compromise or pass a temporary extension in order to give politicians more time to craft a deal. What's going to happen is that the longer this goes on, the more pressure that will be put to bear on these guys to come up with a deal. Markets, businesses, special interests and individuals frightened about social security etc are going to start to become increasingly vocal. I DO think that markets could be at risk until some sort of resolution {temporary or permanent} is designed but I think at some point we should actually look to be buying if that occurs. The reason for my thoughts this way is that away from this issue corporate earnings have been pretty good and the economy seems to be muddling along in the same manner it has for the past year or so. If they come to a solution between now and August 2nd I think the bigger risk is that markets might melt up and not down. Irrespective of anything right now I see stocks simply locked in that trading range that I've been discussing most of this year.

.....I can tell you my reasoning for what I think will happened but I cannot of course guarantee that it will occur. I will also tell you that I can't discount the possibility that stocks won't have a few bad days here until this is resolved and I have to be frank in saying that we should not discount the fact that a very bad day could occur next week if against all expectations the Government goes into a technical default.