Dirty air notwithstanding...

Have you noticed those clean air vehicle only parking stalls showing up around many of your local retail outlets? If you have, and if you haven't yet bought the Leaf, or the Model X, you're either a little perturbed, or you appreciate the effort of retailers to relieve your lungs. Well, if you're the latter, I'll here attempt to cause you a little perturbation the next time you have to park outside those empty spaces reserved for the environmentally unenlightened.

What if I told you that a more apt label for those reserved parking spots (forgetting hybrids for the sake of this essay [I assume they'd qualify for a spot]) would be "coal burning vehicle"? That's right, those (all electric) cars run on a byproduct of the dirtiest of all fossil fuels---roughly 40% of our nation's electricity is generated by coal. So then, the next time you're tailing one of those tailpipeless cars, picture a giant smokestack billowing black residue into the atmosphere---yes, that's what it takes to fuel that little killer in front of you. Imagine the environmental horror, if, tomorrow, Washington were to outlaw the gasoline engine on all new automobiles?

Ah, but we have a solution, capitalism. Specifically, capitalism practiced by the industry environmentalists love to hate in the worst way, the oil industry. That's right, it's the oil industry that is working overtime extracting, and hoping to distribute, worldwide, the cleanest of all fossil fuels, natural gas. Now you'd think that environmentalists---wanting only a cleaner environment---would work alongside big oil to help them make certain that they can extract that wonderful humanity-saving substance as environmentally friendly as possible.

But, please---dirty air notwithstanding---don't hold your breath. The odds of the environmental movement embracing the oil industry and abandoning their zero-emission facade are, well, zero. Here's Al Gore, advising folks to avoid oil company stocks:

The valuation of those companies and their assets is now based on the assumption that all of those carbon assets will be sold and burned. They are not going to be burned. They cannot be burned and will not be burned. No more than one-third can ever possibly be burned without destroying the future.

Yes, I know, if we can get busier harnessing the wind and the sun we can dramatically reduce the need for coal. Okay, but until we (it'll have to be profit-seeking capitalists) can pull that off in a cost-effective manner, let's get cleaner on that cheap and abundant resource that oil companies are more than happy to provide. Oh, but we'd have to somehow get government out of the way... Dang :(...

Market Commentary (audio)

Click the play button for today's commentary...[audio m4a="http://www.betweenthelines.us/wp-content/uploads/1030-commentary.m4a"][/audio]

Today's TV Segment (video)

This morning Zara and I discussed record highs, earnings and the Fed. Plus, I offered some actionable advice for the individual investor.  Also, immediately following, you can catch last week's segment, where we discussed the present political environment and recent action in Apple's shares. Click here to view...

Suffered by all...

"To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful." Adam Smith

Before reading on, please click the following link and watch the three minute video:

CNBC's Jim Cramer, Brian Sullivan and Mandy Drury on Philadelphia's ship building boom...

While Cramer, Sullivan and Drury are unabashedly sincere in their opinions, they, sadly, happen to be unequivocally wrong. The fact that, at first blush, this line of thinking seems to make so much sense is a huge economic problem for America today. Here's why:

The near-completed ship and the next in line---purchased by Exxon---each come with a $200 million price tag. According to Marine Money International, ships with the same capacity can be built in South Korea for $46 million a piece. If Exxon had the freedom---which, due to the Jones Act, it doesn't---to "go into a culture of cheap" as Mr. Sullivan put it, yes (if you happen to live in Philadelphia) you may have a neighbor who wouldn't have a job on the shipyard. But what, if anything, would be gained?

For starters, according to Ed Morse, Citigroup's chief commodity analyst, the costs associated with the Jones Act often make it cheaper to transport oil to Brazil than to New York City. One estimate has the Jones Act premium on a gallon of gas in the North East and Florida at 20 to 30 cents. That's a monster number, considering how many gallons of gas are purchased each day in the North East and Florida (not to mention the rest of the country). Suddenly, protecting someone's neighbor in Philadelphia looks to be a very expensive proposition. But that's not all.

Think about how the savings in the price of a gallon of gas would meander its way through the economy. Imagine the jobs in other industries created for other people's neighbors. But that's still not all.

In a free market for ships, Exxon would save $312 million dollars on just those two. Imagine the resulting investment in other areas, imagine the jobs, imagine the gains in productivity, imagine the potential further savings in fuel prices, and, once again, imagine the jobs. But that's still not all.

The South Koreans' willingness to build ships for 46 million U.S. dollars a piece means that they (and/or their other trading partners) desire goods and services produced in the U.S. Which means business for U.S. exporters. Which means jobs for other people's neighbors. I'll stop here for now, but that's still not all.

Honestly, I could fill a book (which is in the works by the way) on the topic. The bottom line is that the cost of protecting a select industry, while not apparent to all, is suffered by all.

Here, once again, is that visual (the Jones Act has virtually the same effect as the tariff on tires):



 

 

Wishful Thinking...

That the present bull market in stocks is chiefly the result of ultra-easy monetary policy is a most popular presumption these days. An ever-increasing supply of money chasing a finite supply of tradable stocks results in higher share prices, or so the story goes. And, thus---since any tapering of quantitative easing (QE) has been placed on indefinite hold---I'm sensing a great deal of optimism of late. And that, frankly, makes a wee bit near-term nervous.

Not that I necessarily agree with the premise that the Fed deserves all the credit for the present bull run: since the days of QE1, the aggregate earnings for the S&P 500 index have roughly doubled---so unless the Fed is to be credited with creating corporate profits, as I suspect some naysayers would, there's more to the story.

Those who dig below the surface (beyond QE) design legitimate-sounding arguments for where the market goes from here. Let's explore a few of those arguments:

The Bear Cases:

The bears (the present minority) tell us that the quality of earnings stinks. That recent earnings gains are the product of all the cost cutting that occurred as a result of the 2008 recession. That top-line (revenue) growth just hasn't materialized, and given that you can only cut so much---and that there's no sign of substantial GDP growth on the horizon---bottom-line growth is on the verge of stalling. And when missed expectations meet with record-high stock prices, look out below. The bears also make a convincing QE case: We saw the market sell off (albeit modestly) earlier this year on the mere hint that the Fed might "taper" in the coming months. Therefore, when they finally do begin cutting back those bond purchases---and dealing with that bloated balance sheet---look out below. And lastly (for the sake of this essay [there are yet more bear cases being made]), the bears are not at all accepting of the notion that stocks are reasonably valued based on next year's projected earnings. For one, as I stated, they expect earnings growth to stall and, therefore, they don't believe the estimates. For another, many prefer to focus on recently Nobel-crowned Robert Shilller's "Cyclically-Adjusted Price/Earnings Ratio" or CAPE. Shiller's formula, which averages earnings over a ten-year time frame, assigns the S&P 500 a current price to earnings ratio of 24.95. That makes the S&P roughly 57% more expensive than where I value it based on next year's projections.

The Bull Cases:

The bulls tell us that the global economy will see a pick up in the coming months and, therefore, the now-leaner companies whose stocks trade on the major exchanges will see their earnings beat expectations and their share prices propelled further into record territory. They see capital investment, stock buy-backs, mergers, and acquisitions increasing as businesses finally capitulate under the weight of their hefty cash positions. They see the, till now, stubborn holders of treasuries giving way to their greed and hopping onto the stock market bandwagon. They see desperate hedge fund managers, having, this year, grossly underperformed the major averages, abandoning their short positions and going long in a big way. They believe stocks are not only reasonably priced at 15.6 times next-year's earnings, they contend that, when you factor in current interest rates, stocks are way undervalued. And lastly (for the sake of this essay [yes, the bulls have more to tout]), the bulls see the Bernanke (soon to be Yellen) put (as in "put option", or protection) very much in place (a la paragraph 1) for the foreseeable future.

My Case:

I have no near-term bull or bear case to make, or support. Both camps have merit---but that's always my position. I came to the conclusion long ago that, when it comes to investing---and advising---humility is the most valuable commodity. A strong directional conviction can literally ruin a portfolio: Buy the bear case and abandon your long-term strategy (sell your stocks), and you can blow an unrecoverable hole in your portfolio, I've seen it happen. Buy the bull case and abandon your long-term strategy (sell your fixed income assets), and you can, well, just imagine how you'd feel if the bears have it right---and, yes, I've seen it happen. The thing is folks, the bulls and the bears, as educated, as calculating, and as convincing as they may be, are stabbing in the dark. They simply cannot know the near-term future. As for the long-term, make no mistake, they're both right; as John Templeton said, "we will always have bull markets followed by bear markets followed by bull markets."

All that said, I would sure like to see the bears win an inning or two sometime soon. I mentioned above that I'm feeling a wee bit near-term nervous; honestly, that was for effect. I am a little nervous, but in a good way (like I said, I'd like to see the bears win one). That's because the sentiment surveys of late are showing a huge tilt to bullishness. And I'm having to dig a little deeper into my sources to find out what the bears are thinking these days. And margin debt (folks borrowing against their stocks to buy more stocks) is on the rise, big time. Essentially, the investment world's glasses are decidedly rose-colored---and, like John Templeton ("bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria"), I'm a contrarian at heart. I like market corrections, they inject reality into the nervous systems of investors and traders, they "correct" for near-term excesses. I like buying stocks when we rebalance client portfolios. For over two years now, other than rotating a bit between sectors, we've been sellers (back to our clients' equity targets)---and that's a long-time without a meaningful correction. And while I won't go so far here as to label current sentiment euphoric---and I am in no way making a near-term prediction (call it wishful thinking)---it'd be nice for a good healthy correction to knock the optimists down a peg or two, keeping euphoria on the back burner for the time being.

"It"

Here's a snippet from the Washington Post's EJ Dionne's article Hope That Governance Will Return to Washington:

But the most hopeful sign of all is that the shutdown reminded Americans that our country depends on an active, well-functioning government. This has emboldened Democrats to challenge the tea party’s sweeping anti-government bromides with an unapologetic case for the public sector.

“We hear all the time about how government is the problem,” Obama said
when he welcomed the end of the crisis. “Well, it turns out we rely on
it in a whole lot of ways. . . . So let’s work together to make
government work better, instead of treating it like an enemy or
purposely making it work worse.”

So, "the shutdown reminded Americans that our country depends on an active, well-functioning government." That would imply that prior to the shutdown the government was active and well-functioning. Active? Yes! Well functioning? Well, NO!

That "we rely on it in a whole lot of ways", is the saddest of commentaries. For "it" would be that cast of characters whom we've elected to office. Virtually all of it's functions---other than, ideally, providing protection against foreign enemies, adjudicating our disputes and protecting our property rights---involve it confiscating one person's resources to distribute to another in a manner it deems most politically profitable (and self-perpetuating)---fostering a culture of dependency (individual and institutional)---under the guise of the common good.

"I have never known much good done by those who affected to trade for the public good." Adam Smith

Should you pull that trigger?

Now tell the truth, at (at least) one point over the past three weeks you were thinking about selling your stocks, weren't you? I received a couple (literally just a couple) of inquiries from clients. The gist, "if the country defaults on its debt, all hell is going to break loose; shouldn't we get out of the market now, just in case?" My reply, "well, you know, I didn't call you, so obviously jumping out here is not my advice. And, besides, as I have stressed ad nauseam in interviews and on the blog, in my view there's absolutely zero chance the U.S. is defaulting on its debt. Not that the market isn't about to deliver a little (or a lot of) pain---that, I can't predict---it's just that it won't be for the reason you anticipate."

And here you are today, saying "whew! So glad I didn't pull that trigger!" Oh, but hey, you could have been right, stocks could have taken a monster hit, although, again, not for the reason you feared. In fact, had you done so back in the fall of 2011---when our fearful "leaders" were then playing faux debt-ceiling roulette---you would have averted a 16% hit (oddly, traders at the time seemed to think the politically impossible possible). And if you had bought back near the bottom, then held on, you'd be so loving that number you check daily on your custodian's website. Or would you? Think about it, if you struck that ever-elusive market-timing gold during the last debt ceiling battle, don't you think you might have tried it again this go round? My pair of nervous (or opportunistic) clients contacted me when the brinkmanship had reached its zenith (7 or 8 days in), when the Dow was trading around 14,700. Had that been your exit point, you'd have, as of today, blown a nearly 6% hole in this year's performance---assuming, that is, you bought back in today.

All that said, now that the Dow is flirting with its all-time high (the S&P 500 is already there), you might want to go ahead and pull that trigger tomorrow. Maybe the balance of Q3 earnings come in terribly below expectations, maybe next month's jobs number comes in way low, maybe the Fed surprisingly cuts QE before the end of the year, maybe the Middle East heats back up, or etc; any of which (especially the etc.) could spark a panicky sell-off. Although, if you do, and earnings come in better than expected, and next month's jobs number comes in above 250k, or next month's jobs number comes in way low but sparks a rally since, without substantial job growth, the Fed will keep the presses pumping, or those grossly under-performing hedge fund managers capitulate and aggressively buy stocks in hopes of catching up by the year's end, or those who've ridden the bulging bond market decide it's time to rotate to stocks, or etc; you'll sorely wish you hadn't.

Never forget folks, as I suggested back in July of last year (see below), the variables that ultimately determine economic and market direction are too numerous for the human brain to even assemble, let alone forecast. In other words, never try to time the market.

BEWARE THE KING(S), July 31, 2012

The “King of Bonds”, Pimco’s Bill Gross, has given the world a priceless gift. He’s accomplished something other mortals have aspired to, but forever at the expense of their credibility. Thanks to Mr. Gross we finally know precisely what to count on, financially speaking, for the remainder of life as we know it on planet Earth. The guessing’s over. I suppose I should re-think my career path.

Apparently the past century of stock market gains and wealth accumulation was a “freak” anomaly, one to never be repeated. His incomparable (out of 7 billion) brain, has put all the pieces together. He has solved the great riddle; he has determined what he’s dubbed the “new normal”: That is, sub historical-average economic and asset-value growth, in perpetuity.

In essence; he knows precisely how all the world’s individuals will transact their affairs for eons to come.



He foresees advances in consumer technology,



transportation,





and living standards in general.





He can predict the outcomes of political power grabs,



weather patterns,





and natural disasters.



And has gauged the precise impact of each on the global economy.

He has indeed solved nature’s great mysteries.



What forever baffles me is the correlation between the capacity for thinking and the lack thereof for reason. The sad thing (seemingly, but surely not in every case) being; the larger the capacity of the brain (or perhaps the academic achievement, or perhaps the professional accomplishment), the larger the ego – the larger the ego, the lesser the humility – the lesser the humility, the greater the God complex – the greater the God complex, the greater the following – the greater the following, the greater the damage when a black swan (a purely random event) falls from the sky.

 

Krugman doesn't understand the debt market...

Here's Paul Krugman, on his blog last week, displaying, yet again, his lack of understanding the bond market:

Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up.

Man, if it were only that easy! If only long-term rates were determined by expectations for short-term rates, my job would be a piece of cake. But, alas, that's not the world we live in. You see, long-term rates reflect investor appetite, or lack thereof, for long-term bonds. And investor appetite for long-term bonds, as it is for any security or commodity, is determined by numerous, perhaps uncountable, factors. In fact, despite the Fed's own forecast that short-term rates will remain at record lows through 2015 (a long time by Wall Street standards), we watched the 10 year treasury's yield nearly double between May and early September of this year---literally debunking Krugman's assertion. Now, he does finish the above statement with a shred of doubt: he offers up the possibility that long-term rates could "somehow" rise, despite expectations for short-term rates, in the event investors ("China")---for their own reasons---decide to sell long-term bonds. The fact that, as he states, the Fed could inject more helium into the bond balloon is not something to feel good about---unless you believe there'd be no harm in printing money and propping up the bond market every time somebody sells. Talk about inflating bubbles!

If, like me, you're shocked by Krugman's lack of understanding financial markets, his attitude toward the dollar will blow your mind. He states:

It’s true that China could, possibly, depress the value of the dollar. But that would be good for America! Think about Abenomics in Japan: its biggest success so far has been driving down the value of the yen, helping Japanese exporters.

So, the depressing of the dollar would be "good for America!" Hmm... Tell me, are you an exporter? Me neither. I'm just an average consumer who likes to get his money's worth. A depressed dollar does me real harm as it makes for higher commodities (my gas and groceries) prices, and higher prices for the goods I buy from abroad. Odd that Krugman, with all his rancor toward big business, would suggest such a thing.

Cruel legislation...

As you may know, I am no fan of minimum wage legislation. I have, over the years, leveraged, chapter and verse, the work of several of today's (and yesterday's) top economists who---as opposed to those pushing to heighten the barrier between young and unskilled individuals and gainful employment---understand the cruel nature of such legislation.

Here's an excerpt from today's blog post by oft-here-quoted economist Don Boudreaux. He, yet again, makes perfect sense on the topic:

Here’s a project for all unemployed young people – say, ages 18 through 21 – in America today. Go to a nearby supermarket or restaurant or lawn-care company or pet store and ask for a job at the minimum wage. If you are denied, offer to work for $4.00 per hour. The owner or manager will almost surely decline, saying that it’s against the law.

“Would you like to hire me at $4.00?” you ask.

“Well yes I would” is the answer you’re likely to get in reply.

“So, hire me at that wage. I’m an adult, I’m sober, and I have no mental issues. I’m willing to work for $4.00 per hour.”

“You don’t get it, kid. I can’t hire you at that wage. I’ll get fined, or worse. Go away.”

“Ok, I’ll leave. But no one – including you – will hire me at $7.25 per hour. What am I supposed to do?”

“Look kid. That’s your problem. I’m sorry. I don’t make the laws, but I gotta follow them. Go away now.”

Winner and losers...

I just can't do CNBC's Mad Money program; Jim Cramer's shtick doesn't work for me. That said, while my office telly was tuned (yet muted) to CNBC last Wednesday afternoon, I happened to look up and notice a couple of captions highlighting the mad man's monologue: The first one read, words to the effect, that Tesla's Elon Musk is a fantastic CEO. The second read "this is what happens when government gets out of the way and lets the economy run free". The latter was for sure a reference to the then pending deal in Washington that appeared to have sparked Wednesday's 200 point rally in the Dow. My, what a conflicting pair of statements.

I'm sorry, but, as impressive as Musk may be, I'm just not a fan of a CEO who's been quoted as saying subsidies are generally bad, until they work. In other words, deficit spending is a terrible thing until some of it lands on your doorstep, or, subsidies are generally bad, unless they come my way. You see, Mr. Musk was the beneficiary of a few hundred million dollar gift (a below market-rate loan [one not available to the competition]) by the department of energy (that is, the taxpayer) as well as all manner of clean energy subsidies from Uncle Sam and individual states (that is, the taxpayer). In other words---particularly in terms of the department of energy's gift---the government done picked itself a winner, and a loser, or, at a minimum, a payer (that is, the taxpayer).

As for Cramer's second assertion: the striking of a deal that essentially allows the federal government to proceed, business as usual, would not be the definition of government getting out of the way. More aptly, it's the definition of government staying in the way. Okay, now we can for sure label the taxpayer the loser.

The animated Mr. Cramer is famous for his convulsive condemnation---on behalf of his Wall Street brethren---of the Fed for what he viewed as a lack of intervention (or, let's say, a lack of getting in the way) amid the 2008 credit crisis. I wonder how he'd react if the Fed and the politicians were to adopt measures that would truly get government out of the way --- like ending QE and eliminating subsidies to its chosen few?

Dubious data...

In a couple of interviews this week, that I happened to catch, the brand new Nobel laureate Robert Shiller expressed great concern for what he deems to be the "most important problem that we are facing today", income inequality. Honestly, I struggle with this one almost as much as I struggle with protectionism.

While I am no economist---I am simply an ardent observer of the world around me---I suspect that there may be something to this popular notion that, somehow, middle-incomers are losing out to the wealthy. However I, as do eminently more qualified contributors to the topic, also suspect that it is gleaned from data that doesn't nearly account for all the variables---not the least of which being the composition of households today versus, say, thirty or forty years ago (fewer workers in the home bringing down the "household" income number). The articles linked to the final paragraph offer looks at other glaring omissions.

Being the 51 year-old observer---who spent his formidable years in a most everyday middle-income American household---I, like you, if you're of age, have a keen perspective on life in the 70's versus today. While Mom and Dad both worked full time, I earned a pretty steady paycheck myself from the age of 13 on (I can't seem to recall to what extent my 3 older brothers were gainfully employed). Dad---who can yet recall the day his little sister was born in a railway car, and of when, at the tender age of 12, he spent his entire summer cutting wood, and later playing college football without a face mask---was, still is in fact, quite the nostalgist, as was my maternal, social-security-receiving, grandmother. I spent untold hours at the foot of Grandma's rocker (her bedroom was next to mine) as she---the daughter of a middle-income New Mexico “lawman”---shared the wonderful anecdotes of her youth. Like the games of gin she played with the town drunk through the bars of his jail cell. And how, upon returning home in the evening---when fresh chicken was for supper---she was always assigned step one (the euthanizing) of preparing the main course. While  middle income lifestyles of the 70s were no match for today's, they were cake compared to earlier generations.

Our household was blessed with at least 4 incomes in those days, and that was pretty much the norm in our community (do you get the distortion in the then-vs-now household income comparisons?). And we did fine without...well...I'll leave you to list all of the amenities today's middle-income family enjoys versus the family of the 1970s.

Imagine if we could start from here and turn back the clock to the 70s. My, how the then middle-incomer would rail against the unspeakable inequality he endures when compared to the 21st century American standing on that very same rung.

So then, my friends, while volumes of literature have been devoted to convincing you and I that stagnation and inequality run roughshod over today's America, please, just sit back and reminisce awhile. I bet, like me, you will find the data dubious, at best.

Lastly, it occurs to me that the above speaks more to the stagnation myth than it does the chasm that exists between the incomes of the rich and the rest---a supposed injustice that Shiller suggests could somehow be remedied (or at least reduced) by "raising taxes on the rich". Again, I'm no economist, which must be why I can't get my head around how raising taxes on the rich grape farmer, the Der Wienerschnitzel franchisee, the Lazy Boy furniture franchisee, Sears Corporation, and the proprietors of the Palace Bar, the Warner's Theatre, the Star Palace, Save On Energy, and Homes for Sale magazine (places where I worked as a kid) would have, in any way, shape or form, improved the lot of their workers. Now, if you're thinking that my past employers may not have all been "rich", by Shiller's definition, then ask yourself how raising taxes on their respective suppliers (lots of "rich" folks up there) could even remotely benefit (or not, in fact, hurt) middle-income business owners, or their middle and lower-income employees. I guess it takes a Yale economist to figure that one out.

While there's so much more to be explored around the whole income inequality issue---I've tackled it here on numerous occasions (go here, here and here)---for today I'll simply say, in light of the amazing gains achieved on behalf of middle-(and lower)-income Americans over the past few decades, who gives a rip?

 

 

 

Market Commentary (audio)

Click here for today's commentary...

Whew!

It's over! Non-essential government departments will soon be back up and running; regular employees will return to work, and the folks who us taxpayers paid to keep us taxpayers from peeking at Mount Rushmore as we motored by will go back to doing whatever they were doing 17 days ago. Oh, and the treasury will uninterruptedly issue all the debt it needs to continue paying on all the debt it's accumulated. Whew! Did we dodge a bullet or what?

This 11th hour mini bargain gives the players till January 15th to hash out a real budget and till February 7th to negotiate the terms of a longer-lasting debt ceiling deal. That's plenty of time to tackle entitlements, tax reform, immigration reform, the Farm Bill, the Keystone Pipeline, etc., and to take a little well-deserved time off to celebrate the holidays with their families. I mean, this whole thing kinda crept up on them; they have a lot on their plates and God knows how many special interests to take care of. And don't forget, mid-terms are practically around the corner. Posturing, therefore, has to be their number one priority. I mean, what good are they to us if we don't reelect them?

Alright, enough with the cynicism, let's talk markets:

It's funny how we never invest our clients' money into the equity markets unless they have a multi-year time horizon, yet I often find myself addressing short-term dynamics. There is, of course, a method to my madness---my aim is to help our clients make sense of the forces that can move prices in the near-term, which seems to help them maintain a healthy longer-term perspective.

So, for the near-term, the market gets to take its eye off of Washington and onto stuff like earnings, jobs, productivity, sentiment, liquidity, interest rates, valuations, currencies, etc.---variables which are very, well, variable.

In the immediate term, it'll be all about the Q3 earnings reporting season, which is now underway. It's been a fairly mixed bag thus far---although expectations were not great going in, and I suspect that the politicians (the uncertainty they spawned) will serve as scapegoats for most of the misses. Therefore, a lackluster earnings season probably doesn't, by itself, derail this year's rally.

Beyond earnings, I could easily offer up a rosy near-term outlook---based on interest rates, liquidity, hedge funds' underperformance, the economy maybe picking up a little steam, relatively decent valuations, etc.---but I won't. For, as is always the case, I could just as easily turn devil's advocate and offer up a compensating short-term negative---the pending QE taper (although that one's a long-term positive), interest rates potentially spiking, the bond bubble finally bursting, more political posturing, the economy maybe losing steam, etc.---for every one of my positives. Which, by the way, is precisely why we never invest in stocks on a short-term basis.

Stay tuned...

Reverse manipulation (white board lesson)...

Recently, a bipartisan group of 60 senators wrote a letter to Treasury Secretary Lew, asking that we engage in reverse manipulation.

On behalf of their corporate sponsors, the good senators would have us leverage a pending trade agreement to manipulate other countries into halting their manipulation of their own currencies. The senators suggest that actions reducing the value of our trading partners' currencies result in unfair trade relations. And, you know, they're absolutely correct. When China, for example, takes measures that reduce the value of the yuan versus the U.S. dollar, it is giving the U.S. consumer a direct trade advantage over the Chinese consumer. That's right, a weaker Yuan makes Chinese goods less expensive to U.S. consumers, and, conversely, makes U.S. goods more expensive to Chinese consumers. Of course the powers pulling those senatorial strings are looking to turn that advantage in the favor of their foreign customers: By manipulating our foreign trading partners into no longer manipulating their currencies (whether or not many of them do is dubious by the way), the dollar weakens and U.S. exporters gain --- at the U.S. consumer's expense:

Here's how it works:

Market Commentary (audio)

Click here for today's commentary...

Cataclysmic, but only for a minute...

I just listened to two "gurus" on CNBC discuss the potential fallout should the now-thinkable happen. Their assessment was virtually identical to the mainstream media's (fostered by many of today's deep thinkers): that defaulting on the national debt would be cataclysmic.

Well, not so fast...

Yes, I understand that if indeed the U.S. could not honor its obligations all hell might break loose. But the thing is, it absolutely can honor its obligations, with ease. The U.S. dollar, as much as other nations pretend to wish otherwise, is still the world's reserve currency. The U.S. would not default due to any looming structural disaster (not that we don't have structural issues mind you, it's just that they're apparently not yet sufficient to inspire the rest of the world to abandon the world's reserve currency). The U.S., today, would default only as a result of the political will of Congress to not raise the debt ceiling. And that, by the way, is a will that simply does not exist.

But let's say I'm wrong, let's say it happens, we miss an interest payment and---as so many are predicting---the world begins its spiral. If the experts indeed have the fallout story correct, you'll see that tea partying Congress turn into teetotaling wimps faster than you can say Obamacare ain't so bad after all. They'd catch up that payment so fast your head would spin, and very likely---as a promise to our international lenders that it'll never happen again---pull a complete 180; pass new legislation eliminating the debt ceiling forever. And, alas, boot our structurally flawed fiscal can ever further into our children's future.

Now you might think, given the less than rosy opinion I've expressed of the Tea Party movement dating back to the last general election---when one of its cofounders endorsed Rick Santorum---that I'm no fan. It's not that I don't sympathize with much of the message, in fact---when we're talking limiting government---I indeed do. I guess I'm just not a fan of political movements in general. By the time they open their offices, elect their officers and establish their budgets, they exist purely for their own sake, as opposed to for the sake of their stated ideal. Which leads to, among other inconsistencies, the endorsing of a candidate whose voting record is anathema to what the organization supposedly stands for---simply because he appears to have a fighting chance.

Market Commentary (audio)

Click here for today's commentary...

Out on the blacktop...

Here's Starbuck's CEO Howard Shultz on CNBC yesterday morning.

I think every American is watching with profound disappointment and disdain with regard to what is happening in Washington and the dysfunction and lack of leadership. But even though they're watching it from the sideline, they do not have a voice.

This is not a game, this is not a charade, this is the lives of people across the country who are sitting in their homes, walking the streets. These people do not have an opportunity to provide their voice to be heard. Washington is not only letting us down, but they're taking us down a path of no return.

Hmm... Is Washington's present impasse "taking us down a path of no return?" Well, no! However, in pushing the shuttering of nonessential government agencies out a few more weeks, and taking a debt ceiling increase to the wire, our "leaders" may very well be taking Starbucks down a path to weak holiday sales of $4 cups of coffee.

We all know, given our nation's position atop the global economy, that what's transpiring in Washington is entirely unnecessary. We can effortlessly raise the debt ceiling to the applause of a world of willing lenders. The whole budget and debt debate is every bit as unnecessary as those fire drills we stood through as grade school children. Remember those? The fire alarm would ring, the teacher would calmly line you and your fellow students up and march you all out to the blacktop, where you'd loiter around till the bell stopped ringing; then she'd usher you right back to class and back to work as if nothing ever happened.

But of course those fire drills served a purpose. Had your buddy Billy, the budding pyromaniac, carried out his threat to set fire to the science complex you'd have known precisely what to do.

Now if you happen to reside in that camp of rabid pragmatists who believe that a government can't forever spend beyond its means without one day setting fire to its economy---you know, like the following debt defaulters: 

Africa
Algeria (1991)
Angola (1976,[17] 1985, 1992-2002[17])
Cameroon (2004)[17]
Central African Republic (1981, 1983)
Congo (Kinshasa) (1979)[17]
Côte d'Ivoire (1983, 2000, 2011)
Gabon (1999–2005)[17]
Ghana (1979, 1982)[17]
Liberia (1989–2006)[17]
Madagascar (2002)[17]
Mozambique (1980)[17]
Rwanda (1995)[17]
Sierra Leone (1997–1998)[17]
Sudan (1991)[17]
Tunisia (1867)
Egypt (1876, 1984)
Kenya (1994, 2000)
Morocco (1983, 1994, 2000)
Nigeria (1982, 1986, 1992, 2001, 2004)
South Africa (1985, 1989, 1993)
Zambia (1983)
Zimbabwe (1965, 2000, 2006[17] (see Hyperinflation in Zimbabwe)
Americas
Antigua and Barbuda (1998–2005)[17]
Argentina (1827, 1890, 1951, 1956, 1982, 1989, 2002-2005[17] (see Argentine debt restructuring))
Bolivia (1875, 1927,[17] 1931, 1980, 1986, 1989)
Brazil (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986–1987,[17] 1990[17])
Canada (Alberta) (1935)[17]
Chile (1826, 1880, 1931, 1961, 1963, 1966, 1972, 1974, 1983)
Colombia (1826, 1850, 1873, 1880, 1900, 1932, 1935)
Costa Rica (1828, 1874, 1895, 1901, 1932, 1962, 1981, 1983, 1984)
Dominica (2003–2005)[17]
Dominican Republic (1872, 1892, 1897, 1899, 1931, 1975-2001[17] (see Latin American debt crisis), 2005)
Ecuador (1826, 1868, 1894, 1906, 1909, 1914, 1929, 1982, 1984, 2000, 2008)
El Salvador (1828, 1876, 1894, 1899, 1921, 1932, 1938, 1981-1996[17])
Grenada (2004–2005)[17]
Guatemala (1933, 1986, 1989)
Guyana (1982)
Honduras (1828, 1873, 1981)
Jamaica (1978)
Mexico (1827, 1833, 1844, 1850,[17] 1866, 1898, 1914, 1928-1930s, 1982)
Nicaragua (1828, 1894, 1911, 1915, 1932, 1979)
Panama (1932, 1983, 1983, 1987, 1988-1989[17])
Paraguay (1874, 1892, 1920, 1932, 1986, 2003)
Peru (1826, 1850,[17] 1876, 1931, 1969, 1976, 1978, 1980, 1984)
Surinam (2001–2002)[17]
Trinidad and Tobago (1989)
United States (1779 (devaluation of Continental Dollar), 1790, 1798 (see The Quasi-war), 1862,[18] 1933 (see Executive Order 6102),[17] 1971 (Nixon Shock)
9 states (1841–1842)[17]
10 states and many local governments (1873-83 or 1884)[17]
Orange County, California (1994) [19]
Uruguay (1876, 1891, 1915, 1933, 1937,[17] 1983, 1987, 1990)
Venezuela (1826, 1848, 1860, 1865, 1892, 1898, 1982, 1990, 1995–1997,[17] 1998,[17] 2004)
Asia
China (1921, 1932,[17] 1939)
Japan (1942, 1946-1952[17])
India (1958, 1969[citation needed], 1972)
Indonesia (1966)
Iran (1992)
Iraq (1990)
Jordan (1989)
Kuwait (1990–1991)[17]
Myanmar (1984,[17] 1987,[17] 2002)
Mongolia (1997–2000)[17]
The Philippines (1983)
Solomon Islands (1995–2004)[17]
Sri Lanka (1980, 1982, 1996[17])
Vietnam (1975)[17]
Europe
Albania (1990)
Austria-Hungary (1796, 1802, 1805, 1811, 1816, 1868)
Austria (1938, 1940, 1945[17])
Bulgaria (1932[citation needed], 1990)
Croatia (1993–1996)[17]
Denmark (1813)[17] (see Danish state bankruptcy of 1813)
France (1812)
Germany (1932, 1939, 1948[17])
Hesse (1814)
Prussia (1807, 1813)
Schleswig-Holstein (1850)
Westphalia (1812)
Greece (external debt: 1826-1842, 1843-1859, 1860-1878, 1894-1897, 1932-1964, 2010-present;[20][21][22] domestic debt: 1932-1951[20])
Hungary (1932, 1941)
The Netherlands (1814)
Poland (1936, 1940, 1981)
Portugal (1828, 1837, 1841, 1845, 1852, 1890)
Romania (1933)
Russia (1839, 1885, 1918, 1947,[17] 1957,[17] 1991, 1998)
Spain (1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939[17])
Sweden (1812)
Turkey (1876, 1915, 1931, 1940, 1978, 1982)
Ukraine (1998–2000)[17]
United Kingdom (1822, 1834, 1888–89, 1932)[17]
Yugoslavia (1983)

---then you might view the present goings on in Washington as, say, a dress rehearsal, or a fire drill. I mean, what will we do? What will have to be cut, should we suddenly have to live within our means? Well, as Mr. Schultz unintentionally (he's, in my opinion, concerned merely with the fire drill) points out, the federal government has gotten so big---it permeates our lives to such a great extent---that even a suspension of nonessential services might indeed threaten the very wellbeing of every American.

So then, forcing the government to explore its options, and forcing a little stress onto the American citizen, who might---we would hope---force a little fiscal restraint onto the politician, may not be such a terrible thing after all.

Following is the list---copied and pasted from the Office of Management and Budget's website---of our monstrosity of a government's agencies that have thus far developed shutdown contingency plans (notice the date next to each entry). My, if we would only turn these into real spending cuts now, we'd be getting somewhere:

AbilityOne Program (September 27, 2013)
Advisory Council on Historic Preservation (September 27, 2013)
Air Forces Retirement Home | PDF (September 27, 2013)
American Battle Monuments Commission (September 27, 2013)
Appalachian Regional Commission | PDF (December 15, 2011)
Arlington National Cemetery (September 30, 2013)
Armed Forces Retirement Homes | PDF (September 27, 2013)
Broadcasting Board of Governors | PDF (September 27, 2013)
Chemical Safety and Hazard Investigation Board (September 27, 2013)
Commodity Futures Trading Commission (September 25, 2013)
Consumer Product Safety Commission (September 27, 2013)
Corporation for National and Community Service (September 27, 2013)
Council of the District of Columbia | PDF (April 8, 2011)
Court Services and Offender Supervision Agency (September 27, 2013)
Defense Nuclear Facilities Safety Board (September 27, 2013)
Delta Regional Authority | PDF (September 27, 2013)
Denali Commission (September 27, 2013)
Department of Agriculture
Office of the Secretary | PDF (September 27, 2013)
Agricultural Marketing Service | PDF (September 27, 2013)
Animal and Plant Health Inspection Service | PDF (September 27, 2013)
Departmental Management | PDF (September 27, 2013)
Farm Service Agency | PDF (September 27, 2013)
Food, Nutrition, and Consumer Services | PDF (September 27, 2013)
Food Safety and Inspection Services | PDF (September 27, 2013)
Foreign Agricultural Service | PDF (September 26, 2013)
U.S. Forest Service | PDF (September 27, 2013)
Grain Inspection, Packers and Stockyards Administration | PDF (September 27, 2013)
National Appeals Division | PDF (September 27, 2013)
Natural Resources Conservation Service | PDF (September 27, 2013)
Office of the Assistant Secretary for Civil Rights | PDF (September 27, 2013)
Office of Budget and Program Analysis | PDF (September 27, 2013)
Office of the Chief Economist | PDF (September 27, 2013)
Office of the Chief Financial Officer | PDF (September 27, 2013)
Office of Communications | PDF (September 27, 2013)
Office of Ethics | PDF (September 27, 2013)
Office of the General Counsel | PDF (September 27, 2013)
Office of Inspector General | PDF (September 27, 2013)
Research, Education and Economics | PDF (September 27, 2013)
Risk Management Agency | PDF (September 27, 2013)
Rural Development | PDF (September 27, 2013)
Department of Commerce (September 27, 2013)
Department of Defense | PDF (September 27, 2013)
Department of Education | PDF (September 27, 2013)
Department of Energy (September 27, 2013)
Department of Health and Human Services | PDF (September 27, 2013)
Department of Homeland Security | PDF (September 27, 2013)
Department of Housing and Urban Development (September 27, 2013)
Department of Interior
Departmental | PDF (September 27, 2013)
Assistant Secretary for Indian Affairs | PDF (September 27, 2013)
Bureau of Indian Affairs | PDF (September 27, 2013)
Bureau of Indian Education | PDF (September 27, 2013)
Bureau of Land Management | PDF (September 27, 2013)
Bureau of Safety and Environmental Enforcement | PDF (September 27, 2013)
Bureau of Reclamation | PDF (September 27, 2013)
Fish and Wildlife Service | PDF (September 27, 2013)
National Park Service | PDF (September 27, 2013)
Office of the Inspector General | PDF (September 27, 2013)
Office of Insular Affairs | PDF (September 27, 2013)
Office of the Secretary | PDF (September 27, 2013)
Office of the Solicitor | PDF (September 27, 2013)
Office of the Special Trustee | PDF (September 27, 2013)
Office of Surface Mining | PDF (September 27, 2013)
Policy Management and Budget | PDF (September 27, 2013)
U.S. Geological Survey | PDF (September 27, 2013)
Department of Justice (September 27, 2013)
Department of Labor (September 27, 2013)
Department of State (September 27, 2013)
Department of Transportation | PDF (September 27, 2013)
Department of Treasury (September 27, 2013)
Departmental Offices | PDF (September 27, 2013)
Bureau of Fiscal Service | PDF (September 27, 2013)
The Alcohol and Tobacco Tax and Trade Bureau | PDF (September 27, 2013)
Financial Crimes Enforcement Network | PDF (September 27, 2013)
Internal Revenue Service | PDF (September 30, 2013)
Special Inspector General, Troubled Asset Relief Program | PDF (September 27, 2013)
Treasury Inspector General for Tax Administration | PDF (September 27, 2013)
Office of Inspector General | PDF (September 27, 2013)
Department of Veterans Affairs | PDF (September 27, 2013)
District of Columbia
DC Courts | PDF (September 27, 2013)
Public Defender Service (September 27, 2013)
Election Assistance Commission | PDF(September 27, 2013)
Environmental Protection Agency | PDF (October 1, 2013)
Equal Employment Opportunity Commission (September 27, 2013)
Executive Office of the President (September 27, 2013)
Export-Import Bank of the United States | PDF (December 15, 2011)
Farm Credit Administration (September 27, 2013)
Farm Credit System Insurance Corporation (September 27, 2013)
Federal Communications Commission | PDF (September 27, 2013)
Federal Deposit Insurance Corporation (September 27, 2013)
Federal Election Commission | PDF (September 28, 2013)
Federal Energy Regulatory Commission (September 27, 2013)
Federal Labor Relation Authority | PDF (September 27, 2013)
Federal Maritime Commission (September 27, 2013)
Federal Mine Safety and Health Review Commission (September 27, 2013)
Federal Trade Commission (September 27, 2013)
General Services Administration (September 27, 2013)
Institute of Museum and Library Services | PDF (September 27, 2013)
Inter-American Foundation (September 27, 2013)
International Boundary Commission (September 26, 2013)
International Boundary and Water Commission (September 27, 2013)
International Joint Commission (September 26, 2013)
Kennedy Center (September 27, 2013)
Marine Mammal Commission | PDF (September 30, 2013)
Millenium Challenge Corporation (September 27, 2013)
National Aeronautics and Space Administration (September 27, 2013)
National Archives (September 27, 2013)
National Capital Planning Commission (September 27, 2013)
National Council on Disability | PDF (April 8, 2011)
National Endowment for the Arts (December 15, 2011)
National Endowment for the Humanities | PDF (September 27, 2013)
National Gallery of Art (September 27, 2013)
National Labor Relations Board (September 27, 2013)
National Mediation Board (September 30, 3013)
National Science Foundation | PDF (September 27, 2013)
National Transportation Safety Board | PDF (September 27, 2013)
Nuclear Waste Technical Review Board | PDF (December 15, 2011)
Occupational Safety and Health Review Commission (September 27, 2013)
Office of the Special Inspector General for Afghanistan Reconstruction (September 27, 2013)
Office of Personnel Management (September 25, 2013)
Overseas Private Investment Corporation | PDF (September 27, 2013)
Peace Corps (September 27, 2013)
Postal Regulatory Commission (September 27, 2013)
Privacy and Civil Liberties Oversight Board (September 27, 2013)
Small Business Administration | PDF (September 27, 2013)
Securities and Exchange Commission (September 30, 2013)
Selective Service System (September 27, 2013)
Smithsonian Institution | PDF (September 27, 2013)
Social Security Administration (September 27, 2013)
Special Inspector General for Iraq Reconstruction | PDF (April 8, 2011)
Udall Foundation (September 27, 2013)
Environmental Conflict Resolution (September 27, 2013)
United States Access Board (September 27, 2013)
United States African Development Foundation | PDF (September 27, 2013)
United States Agency for International Development | PDF (September 27, 2013)
United States Commission of Fine Arts (September 27, 2013)
United States Holocaust Memorial Museum (September 27, 2013)
United States Interagency Council on Homelessness (September 27, 2013)
United States International Trade Commission (September 30, 2013)
United States Merit System Protection Board (September 27, 2013)
United States Nuclear Regulatory Commission (September 27, 2013)
United States Postal Service, Office of the Inspector General | PDF (September 27, 2013)
United States Railroad Retirement Board | PDF (September 27, 2013)
Office of the Inspector General (September 27, 2013)
United States Systems Protection Board | PDF (April 8, 2011)
United States Office of Government Ethics | PDF (September 27, 2013)
United States Office of Special Counsel (September 27, 2013)
United States Trade and Development Agency (September 27, 2013)
Woodrow Wilson International Center for Scholars | PDF (September 27, 2013)

Wednesday's TV Segment (video)

Due to an update to the station's website, this one's coming to you a little late. The events of the past couple of days are consistent with Wednesday's conversation with Zara. Where I mentioned the government "debt to income ratio", I was making reference to debt service to tax revenue, as opposed to total debt to gdp...

Click here to view...

Wow! but...

Wow! What a rally today in stocks! Just when both sides (of the political aisle) looked to be hunkering down for the duration (to the 11th hour, that is), the Republicans float a 6-week debt ceiling proposal.

More thoughts on that to come...

For now I want to prick your bubble just a bit, sorry, and offer a little insight---via a white board lesson I presented in June of last year---into a day when the Dow spikes 300 points amid this kind of uncertainty:

I'm going to make a fast food fortune!!

If you know me well, you know I'm weird---I suspect in a number ways---but for sure in the way I eat. I really really like mint chocolate chip ice cream cake. I like my steaks with lots of fat around the edges, they taste better that way. I love my eggs sunnyside up so I can dunk my heavily buttered toast in their yokes. Oh man, I love super-thick french toast topped with loads of butter and maple syrup. I drool over that chocolate cake thing with the warm fudge oozing out, à la mode. Swear to God, I'm drooling (well, salivating) bigtime right now! But, you know, there are things I love even more: I love to play basketball for hours on end with my 24 year-old son and his buddies. I love being able to climb in and out of my kayak. I love to scale small mountains to reach secluded trout streams. I love to easily button my pants. I love the fantasy of being 78 years old and playing basketball with my 51 year-old son (if he can still hang), and my 20-something year-old grandkids. Therefore, I virtually never partake, save for the occasional ice cream cake at a family birthday party, of those items I'm still salivating over.

One of my best friends turned 76 this year. He and I share a common love for fishing, and, in fact, looking up at my food list, we share a love for the same types of food as well. The difference being that my buddy Dan, without regret, has a warm loving relationship with his taste buds. He's not at all into basketball, although you might think so upon meeting him; for, at first glance, it appears as though he's carrying one under his shirt. When we eat out at the local diner of whatever small fishing community we happen to be visiting, upon the arrival of his final course, typically the pie of the day (à la mode), he likes to motion to my oatmeal (yes, oatmeal), pat his basketball tummy, and say "Marty, food is my greatest pleasure." And, you know, even if I could, I wouldn't dream of robbing my good friend of his delight.

Now, if you happen to be Mark Bittman of the NY Times, you might say to me "what about Dan's life? How can you sit back and watch him kill himself with his awful diet?" Well, for starters, Dan's doing pretty good for his age, but aside from that, he's a free man, who has a physician, and who can read nutrition labels, and who can kill himself if he damn well pleases! His earthly pleasures are entirely his business!

Yesterday's column by Mr. Bittman is titled Why Won't McDonald's Really Lead? He means, lead in the war against Dan-style food. And from what I gather from his article, McDonald's has been trying mightily to appease the world's Mr. Bittmans. But not nearly, not nearly nearly, enough to please the valiant do-gooders. 

Now, I can't tell you precisely the last time I sipped a soda or nibbled a french fry. But I know it's been decades. I will tell you this, however, if the likes of Bittman can really turn the tide on fast food quality, if they can truly get McDonald's to lead Burger King, Wendy's, Jack in the Box, etc., down the path of food righteousness, I'm going to be investing bigtime in the fast food industry. But not in the above names mind you, I'm opening my own. I'll call it Fat Boy's American Fast Food Joint. Our spiel will be "we treat our adult customers like adults, and our kid customers like they have adult parents. With us, flavor comes first. We're here for the adult, and the kid with adult parents, who doesn't need us to dictate to them what's good for them. Come to us when you're ready to spoil your taste buds."

Here's Bittman's close:

If McDonald’s wanted to be on the right side of history, it would announce something like this: “Starting tomorrow, we’re not offering soda with Happy Meals except by specific request. And starting Jan. 1, at every McDonald’s, we’ll be offering a small burger with a big salad for the price of a burger and fries to anyone who asks for it; we’re also adding a chopped salad McWrap. We challenge our competitors to follow us in making fast food as healthful as it is affordable, and we dare our critics to say we’re not changing.”

That ain’t gonna happen. But if it did, I’d be the first in line to applaud.

Well, perhaps that ain't gonna happen, but make no mistake, if the likes of Bittman could pass a law requiring all of the above, and keep me from making my fast food fortune, they'd do it in a heartbeat. "No way!", you say? Read my letter to the authors of the Journal of Nature article, The Toxic Truth About Sugar...

Flying blind, always...

When recently asked to comment on the absence of data resulting from the government shutdown (last Friday's cancelled jobs report for example), CNBC economics reporter Steve Liesman replied (on behalf of the Fed) "it's like flying an airplane without any radio with the windows covered up."

As I have vented here a zillion times, I marvel at the so widely held notion that mere men and women---the most academically accomplished even---can even begin to believe they can fly the economy any more than they can flap their arms and fly themselves.

Here's enlightened economist Don Boudreaux on the topic (be sure to read the entire article):

Attempts to centrally plan economies are very much like attempts to fly by dressing like and flapping like a bird: utterly futile because the most that can be observed of any successful economy are a handful of large details (“assembly lines,” “retail outlets”…..). The vast majority (99.99999999999…9 percent) of the details that must work reasonably well aren’t observed by the would-be central planner. What Hayek called “knowledge of the particular circumstances of time and place” – knowledge of details spread today across the globe and across billions of different human minds – is not incidental to the successful operation of a modern economy. Utilizing that knowledge – vast, deep, changing, incredibly fine-grained detailed knowledge – is the very key to a successful market economy.

Central planning is as futile as trying to strap on wings and fly like a bird --- and potentially as calamitous.

The uncredible threat-OR-The waiting-AND-Tom Petty (video)

It's been eerily quiet in my world this past week and a half. One might think that, given the advertised threat of catastrophe, investors, en masse, would be storming the exits. Yes, the Dow's off a few hundred points since the "shutdown" began, but trust me, a panicky sell-off this ain't been. What we've witnessed the past few days is what you'd call a buyers strike. Meaning, most would-be buyers are sitting tight till the storm subsides. Meaning, anyone desiring to sell has been at the mercy of the few buyers who are willing to test the water, but who are forcing sellers to meet them at somewhat lower depths.

So, no one's panicking, and, therefore, stocks aren't replaying that 2011 rout. That's good, right? Well, yeah, but if you're tired of waiting on that group of self-serving U.S. citizens who had what it took to ascend descend to "higher" office (the ability to promise bennies to their backers while [with a straight face] promising to unfailingly serve the masses) to kick our ugly fiscal can down the road, you really want that rout. Nothing will inspire Boehner to put a clean resolution and a debt ceiling increase to vote faster than, say, a thousand point one-(or two)-day plunge in the Dow.

Now lets you and I explore the prospects for a U.S. government debt default. First of all, there are no prospects for a U.S. government debt default; even if---by some miracle display of political will---the debt ceiling doesn't get raised. Here's why: Say your household income this year will be $100,000, and your debt service payments will total $15,000 (which, btw, is a higher debt service to income ratio than Uncle Sam's). Now let's assume that, up until this year, you spent every dime you made---leaving nothing to make your loan payments---but were able to leverage your perfect credit rating to borrow enough, and some, to service that debt. This year, however, for whatever reason, you can't borrow to make those payments. What do you do? Continue to spend every dime and not service your debt? Or do you simply bite the bullet, cut out a few nonessentials and preserve your credit standing? You, of course, do the latter. As will Uncle Sam.

But let's, for conversation's sake, say the impossible happens: We get to October 17th (if that indeed is the drop dead date) and the U.S. says to the world "sorry we can't make you that interest payment right now. We have other obligations to meet, but don't sweat it, we'll get back to you shortly." What, for example, is China to do? Sell its trillion+ in treasuries? And, if so, to whom? At what price? And if China did, wouldn't Japan? And if China and Japan essentially sparked what the world would view as a Lehman, of course opportunists would bid those bonds down to rock bottom prices. In fact, I'd join in on behalf of our clients. That's right, I'd be a buyer of treasuries at those lower prices, bigtime! (although the Fed would surely beat me to it) Why? Because there's no way a default gets to last more than the time it takes for China to unload a penny's worth of treasuries and/or the Dow to drop that thousand points. Or to do God knows what to the repo market, or the commodities futures market (where treasuries by the billions are used as collateral). Or authorities to change the rules that would otherwise spark the sale of a downgraded debt security in, say, money market funds and some pension plans.

Congress would convene, the debt ceiling would be raised and the treasury would issue the world's safest security like nothing ever happened. And, by the way, China wouldn't, after all, sell a penny's worth.

As counterintuitive as it seems, if America defaults for a day or three, I see treasury yields plunging (prices rising) and the dollar rallying as the panic-stricken race to "quality" (of course a month or three might be an altogether different proposition). Which means, alas, that great buying opportunity in treasuries doesn't materialize. Although stocks would become a screaming buy.

I could very well be wrong; perhaps the world would rush to the bund (Germany) instead, and maybe our financial system would indeed collapse, as so many are predicting. The thing is, my reputation as a prognosticator (this is my first-ever official short-term stab btw) is in no jeopardy, for there's no way my prediction is going to be tested.

So, while the politicians play their cards, the world waits for clarity. As for you and me, in the words of the great Tom Petty, "baby we know better than to try and pretend"...  

"The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part"

Market Commentary (audio)

Click here for today's commentary...

Market Commentary (audio)

Click here for today's commentary...

TARP was a success, for Buffett...

So Warren Buffett calls Hank Paulson and suggests a preferred stock scheme to bailout banks. Hank bites, Warren buys---having designed a way to make big on too-big-to-fail---and ultimately pockets a few billion in profits.

Just last week Mr. Buffett, on CNBC, tells the world that TARP will be chronicled as a success. Well, I don't know about that, but I do know that it was a wonderful thing for Buffett.

Here's Buffett on what inspired him to invest a few billion in Goldman Sachs, note the "Paulson proposal":

If I didn't think the government was going to act, I would not be doing anything this week. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal. Last week will look like Nirvana if they don't do something.

So Bankers stay rich, Buffet gets richer, and moral hazard remains---all on the taxpayer's dime.

Here's a little something I penned last year on moral hazard:

In Ayn Rand’s book The Virtue of Selfishness (Rand & Branden 1964), she made brief reference to people with a rare condition that renders them insensitive to pain. My immediate thought upon reading her reference was how such a condition might be analogous to the players in the 2008 credit crisis. So I did a little research. And while it was easy to make my point in the following, I must say that the articles I read and the videos I watched on congenital insensitivity to pain with anhidrosis syndrome (CIPA) were anything but easy to take in; in fact, they were utterly heartbreaking. There are precious children in this world (seldom surviving childhood) who are otherwise as vibrant and beautiful as children can be who literally feel no physical pain. I would never have imagined how truly tragic this turns out to be.

Pain Is Essential
How would you like to be one of the few hundred people in the world who live literally pain free? Never to experience a headache, a bad back, or pulled muscle. Never to need a pain pill, not even an aspirin. To never suffer the aches of an aging body. Think about it: the sheer bliss. The excitement. What would you try? What risks would you take, knowing you’d feel no physical pain?

How would you like to have been a CEO of a major Wall Street firm at virtually anytime over the past thirty years? Your senses numbed by the knowledge that Uncle Sam would steal away your pain if you banged your head too hard. Knowing you could lever-up to unheard-of multiples and never truly lose. Stay in business, get your bonus, pay the staff at your Swiss chalet—or, at the very worst, walk away with a few dozen (if not a few hundred) million, while the taxpayer buys the mistakes off your firm’s balance sheet. Leaving you, or your successors, with billions of crisp new dollars with which to leverage the next bets. My, the risks you would take.

Better to have been the latter. For while the notion of never feeling physical pain may, at first blush, seem amazing, the lives of children with congenital insensitivity to pain with anhidrosis (CIPA) are anything but. Their fingertips are missing, their tongues are mangled, they get heatstroke often (they don’t sweat), fractured bones go unnoticed, and, tragically, their lifespans are shortened. Parents of the CIPA child never rest. They can’t turn their backs for a second, for there’s no physical limit to the harm their child might inflict, unwittingly, upon himself.

As for the Wall Street exec of 2008, he maintains ten finely manicured fingertips and suffers zero fractured bones. Not that his reckless actions didn’t inflict great pain; on the contrary, they did indeed—just not, alas, onto himself. The unavoidable (natural) consequences of his egregious risk-taking and overleveraging were relegated, at the hands of politicians and central bankers, to the taxpayer.

As for the moral hazard of bailouts: they’d have us believe that with all the new regulations, too-big-to-fail is no longer a possibility—that, like the CIPA parent, Washington has Wall Street under strict surveillance. But make no mistake: mistakes will be made. As long as we persist in appointing career politicians concerned with merely the immediate term (their term in office, that is), Washington will crony-up to corporate America, unions, etc., and vice versa.

Simply put: pain in life, and in business, is essential.

The Debt Issue IS Phony! Really??

Well shoot! I got up this morning early, intending to dive into a new book, when I made the fatal error of looking at my emails and clicking a link to an article titled Is The Debt Issue Phony?

I thought I'd share with you the knee-jerk, hopefully coherent (I really want to get to that book), reaction I couldn't help but type into the article's comment section

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Wow! Where to begin...

Coke, really? Coke posted $10 billion in net income last year. How did Uncle Sam do? Oh, that's right, we're not supposed to make those kinds of comparisons. Not, that is, unless---in some dimension---it supports our story.

And you somehow know that we're poised for years of economic growth, and then you get real and say we have no clue how the future will unfold.

And, I didn't know this, but we can grow assets at will. Wow!! We develop a "real debt crisis", and, as you say, the answer is simple, "grow assets". Sure, just like all those other countries throughout history have done. You know---the ones who have borrowed themselves into real crises---how they've just turned the switch, and voilà!, grown assets. As opposed to inflating their currency, decimating their economies and outright defaulting on their debt. Never mind the fact that growing government debt is synonymous with growing government, and growing government is synonymous with a slowing private sector, and how history utterly demolishes your theory.

And I'll stop here (I could go on all day) with saying thank you for putting us all at ease with your assets to government debt analysis. We can sleep easy knowing that when we get into a real debt crisis, all we have to do is nationalize 20% (at this point) of net household assets and we're in good shape.

Dang it! One more: You're kidding us on your interest on the debt analysis, right? I mean, you make the statement that we'll never pay off the debt, which means we'll be refinancing it into eternity. Now, if we're, at this juncture, so utterly sanguine about Uncle Sam's ability to borrow harmlessly into the future, do you think just maybe we could (just maybe) one day find ourselves in a "real debt crisis"? I mean, what happens if the rest of the world, our creditors, don't agree that a country can simply operate on a credit line for eternity. And, you know, some of them don't. And if they, therefore--somewhere along the way--decide to do more transacting in other currencies, and less lending to Uncle Sam, you think maybe we run into a bit of trouble, maybe interest rates rise, maybe a lot? And if interest rates rise, maybe alot, well, I guess rising interest rates on God knows how many trillions in debt---rolling over in perpetuity---is what you might call a debt crisis.

Never a dull moment...

"After Congress failed to reach an agreement on a new spending bill, the federal government officially shut down. So roads won't get fixed, public employees won't be able to help you, and getting a federal loan for a house will be very difficult — but there will also be a lot of differences." Jimmy Fallon

It's day 4 and we're still here. Still no deal, but Boehner says there'll be no default. He's clearly attempting to create a little space between himself and his colleagues who are beholden to the Tea Party. And, from what I can tell, he's receiving some pats on the back as a result. Nobody wants to bear the blame for a government default (not even, I suspect, the Tea Party). At this juncture, those who've been assigned the task of killing the Affordable Care Act, knowing it ain't happening, are praying that appearing to try really hard will keep their supporters engaged.

As for the market, while the down days were down more than the up days were up this week, nothing resembling panic has yet hit the trading floor. Going into the weekend with green arrows tells us that traders---for the moment anyway---believe the political risk will ultimately take care of the market risk.

Rest assured---potential fireworks notwithstanding---this will soon blow over and it'll be smooth sailing from then on. I mean, from then until the market begins thinking about the QE taper, 3rd quarter earnings, the Middle East, interest rates rising, revenue growth, Euro Zone debt, Italian politics, consumer sentiment, industrial production, capacity utilization, the unemployment rate, durable goods orders, 52 week moving averages, China GDP, and roughly a zillion other things. Never a dull moment...