Truth or Who Cares?

Everybody knows you cannot trust information you find on the internet or receive in emails.  But, sometimes, it doesn't matter, because the idea is more important.  I'm quoting from an email a honest friend sent me.  While I don't know if Warren Buffett said this or not, the idea is more important than the facts.

Warren Buffett, in a recent interview with CNBC,offers one of the best quotes about the debt ceiling ...

"I could end the deficit in 5 minutes," he told CNBC.

 

"You just pass a law that says that any time there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election."

The 26th amendment (granting the right to vote for 18 year-olds) took only 3 months and 8 days to be ratified!  Why?

Simple! The people demanded it.

That was in 1971 - before computers, e-mail, cell phones, etc.

Of the 27 amendments to the Constitution, seven (7) took one (1) year or less to become the law of the land -

all because of public pressure .

 

Warren Buffet is asking each addressee to forward this email to a minimum of twenty people on their address list; in turn ask each of those to do likewise. In three days, most people in The United States of America will have the message.

This is one idea that really should be pass ed around.

Congressional Reform Act of 2013

1.   No Re-election if over 3% Deficit

If there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.

2.   No Tenure/ No Pension

A Congressman/woman collects a salary while in office and receives no paywhen they're out of office.

3 . Congress (past, present & future) participates in Social Security.

All funds in the Congressional retirement fund move to the Social Securitysystem immediately. All future funds flow into the Social Security system,and Congress participates with the American people. It may not be used for any other purpose.

4 . Congress can purchase their own retirement plan, just as all Americans do.

5 . Congress will no longer vote themselves a pay raise.

Congressional pay will rise by the lower of CPI or 3%.

6 . Congress loses their current health care system and participatesin the same health care system as the American people.

7 . Congress must equally abide by all laws they impose on the American people.

8. All contracts with past and present Congressmen/women are void effective 12/31/13.

The American people did not make this contract with Congressmen/women.

Congress made all these contracts for themselves.

Serving in Congress is an honor, not a career.

The Founding Fathers envisioned citizen legislators,

so ours should serve their term(s), then go home and back to work.

If each person contacts a minimum of twenty people then it will only take three days

for most people (in the U.S.) to receive the message.

Don't you think it's time? 

Quarterly Column

Long-term readers know I write a column for Inside Business, which is affiliated with The Virginian Pilot and owned by Landmark Communications.  My latest column can be found here:

http://insidebiz.com/news/third-quarter-saw-us-get-past-abyss-almost

Wake Up, Ronnie!

My favorite professor at Wharton has always been the brilliant Jeremy Siegel.  Today, I'm quoting from his latest Commentary:

With the current stalemate in Congress, I began imagining the formation of a third political party that would be fiscally conservative, socially fairly liberal, and strongly dedicated to solving the tough problems that face our country. Many of the party would be non-Tea Party Republicans who no longer want to be held hostage to the right wing of their party. I think such a third party could get 20% to 30% of the popular vote, deny either the Democrats or Republicans an outright majority in Congress, and force either the Dems or the GOP into a coalition to run the country. For such a model, just look at the United Kingdom, where current Prime Minister David Cameron was forced into a coalition with the Liberal Democratic Party in 2010 to form a government. It was the first coalition government since World War II.

It sounds like he is arguing that Reagan Republicans should secede from the Republican Party.  I'm sure Ronald Reagan must be rolling over in his grave!

American "Opium"

Communist theorist Karl Marx once said "religion is the opium of the people."  That may be true in some places and during some times.  But, in America, it is more true that "credit card debt is the opium of the people."

Since the global financial crisis in 2008, Americans have taken a twelve-step program and seem to be kicking the habit of using credit cards and paying those high interest rates.  After total credit card debt routinely increased about 10% year after year, it dropped that much in 2009 and has been relatively flat since then.  (It actually fell $883 million in August.)

Of course, total debt of consumers continues to rise, but it is mostly car loans and student loans.  Car loans are good debts.  However, it is still unclear if student debt is good or bad.  (Is a diploma from some "failure factory" worth more or less than a new wardrobe?)  But, the point is that credit card debt is NOT rising.

As a whole, monthly debt service of households has fallen from 17.6% in 2008 to only 13.8% now.  That is a huge change.  The America consumer is getting healthier financially.  Well, those Americans who don't need a job are getting healthier financially.

The gap between those of us who don't need jobs and those who do need jobs is getting wider and wider.  I'm sure Karl Marx would have much to say about that as well . . . but I'd rather not hear it!

Different This Time ?

A government shutdown is not new.  It has already happened eighteen times.  But, how has the stock market reacted in the past?  Take a look at this interesting graph:

The market falls for a few days before rising sharply, when investors realize the world did survive.  After a little over-enthusiasm, the market then resumes its gradual, sustainable rise.  Based on this, the market should start rising quickly today, but the futures market indicates another losing day.

The difference is that there has never been a simultaneous debt ceiling debacle.  Therefore, I don't expect this big relief rally until confidence rises that a default on U.S. debt will be as survivable as another government shutdown.  Then, I do expect a sharp rally.  

Warren Buffet thinks a one or two-day technical default will not be "a big deal," and I agree.  But, it is still embarrassing.  It is like being a day or two late on your credit card bill . . . but worse.

There is considerable debate whether the Treasury Department has the legal authority to pay interest without simultaneously paying out Social Security checks.  It might be far better to "act now, ask forgiveness later" by paying the interest bill now and asking the Social Security recipients for forgiveness later.  Our creditors will be happier and those Social Security recipients, not suffering quietly, will besiege Congress to act like adults . . . finally.

Just Another 61-Year-Old Movie

As a boy, I thought the ideal life was being a low-level bureaucrat, doing as little work as possible and spending as little money as possible, until I would finally got a hand-shake and a pension.  However, once I read my first Ian Fleming novel, bureaucracy lost its charm for me forever.

When my curiosity about existentialism began in Texas decades ago, I read about an obscure Japanese movie made in 1952 called Ikiru, (Japanese for "to live") about a low-level bureaucrat who learns he has terminal stomach cancer with only six months to live.  He had been dutiful and thrifty all his life but was now dying anyway.  Because the movie has been described as the greatest existential movie ever made, I went to the local video store (remember those?) and asked if they could order the movie for me.  They just laughed.

Eleven years ago when I first found Amazon, I looked for the video again without success, except for a short book about it.  Imagine my surprise when it just popped up on Amazon recently as recommended for me, based on previous purchases.  Of course, I bought it, and it was a joy to watch that grainy, black & white old movie.

Two themes run through existentialism.  One is the abundance of absurdity, and the other is man's obsession with death.

In this movie, we see the neighborhood mothers complaining about a cesspool that was making children sick.  We see them being shuffled from agency to agency, from department to department, from bureaucrat to bureaucrat, with nothing being accomplished.  You cannot miss absurdity of it.

Realizing the end of his drab,boring life is quickly approaching, he makes the mistake of many old fools and finds the innocent exuberance of young women irresistible, but only for a short time, before one tells him her exuberance comes from actually accomplishing something.  With little time left, he commits himself to fighting his fellow bureaucrats and turning the neighborhood cesspool into a park for children.

After the dedication ceremony of the park, where he is not recognized for all his effort, he stays in the park, sitting on the children's swing as the snow falls.  He froze to death that night, but a witness reported the old bureaucrat was singing softly as he lay dying in the snow.

The absurdity of excessive structure in life and the importance of doing something despite your impending death remind me of some Jimmy Buffet lyrics about "I'd rather die while I'm living . . . than live when I'm dead."  The old bureaucrat in Ikiru didn't start living, really living . . . until he started dying.

Generation Shutdown

The impasse in Washington is difficult to understand.  Is it just the tired, old Republican versus Democratic conflict?  Is it more of a philosophical conservative versus liberal conflict?  I have viewed it as Tea Party versus Reagan Republican conflict.  But, one pundit suggested the obvious, i.e., that it is all the above but complicated by a generational conflict.

She speculated that the average age of Reagan Republicans is 60, while the average age of Tea Party members is only 45 (but didn't have the metrics to back that up).  She did not speculate why that was important.

Is it because younger people see black & white clearly but not grays?   Is it because older people have lost the will to fight or already have a belly-full of conflict?  Is it because older people have found confrontation is seldom a winning strategy over the long-term?

Philosopher Jean-Jacques Rousseau (1712-1788) wrote extensively on how people reflect their social and historical environment.  A 45-year-old has no memory of Vietnam.  Their only experience with war is the "war on terror" in which a small number of volunteers fought far from home.  Their only obligation is to be overly-solicitous of veterans, merely thanking them for their service.  They came of age in the aftermath of the Cold War, as the world recognized the U.S. as the only super-power.  They came into middle-age as the U.S. stumbled into the realization that we will not remain the only super-power much longer.  They witnessed the birth of the internet age, when sources of communication diversified from the mainstream media into outlets for every extreme viewpoint.

Futurist Alvin Toffler (born 1928) wrote extensively about the rate of change increasing ever faster.  Does a mere 15 year difference in average age change perspectives that much?

Is there such a difference in generational perspective among Democrats?  Why not?

Uncomfortable Bedfellow

Wall Street pundits, from coast-to-coast, have been worrying themselves sick about the possible failure of Congress to raise the debt ceiling, followed by the first default in history by a country with the reserve currency.  Only a fool would not be worried about this.  It could indeed be frightening, and I have spent quite a bit of time thinking about it.

Think of  it in two ways.  One, what is the probability of Congress failing to raise the debt ceiling?  Two, what are the consequences if they do fail?

First, the worst thing that could happen would be another stalemate.  I would worry less if one side is much, much stronger than the other side.  While I certainly have my preference, my preference is not important.  What is important is raising the debt ceiling.  It doesn't matter to me as an economist if the Republicans or the Democrats "win."

Public opinion is moving strongly behind the Democrats, as a result of the government shutdown.  The longer the shutdown, the stronger the Democrats will be in raising the ceiling.  If that decreases the probability of default, I'm all in favor of that.

Second, in a purely academic world, investors around the world should shun U.S. Treasury Bonds unless they are compensated accordingly, which means a rise in our interest costs and which we cannot afford.  In the real world, the Fed is likely to actually increase, not "taper," quantitative easing or buy enough of the bonds to keep interest rates low.  This may be good in the short term but not in the long term.  Selling the bonds will not be the issue, in the event of default.

Also, I've been reading as much as possible about the reaction of foreigners to a U.S. default, and they appear remarkably sanguine.  One referred to us genially as "those wacky Americans."  Many cannot resist comparing the U.S. government to the hopelessly ungovernable Italian government.  But, nobody is talking about actually losing money on U.S. Treasury bonds.  That does not mean gold will not rise, nor that oil will not fall.  They will, but they are not as volatile as I originally feared.

I expect the stock market will continue to drift downwards until there is some resolution, but this should be a buying opportunity.  That doesn't mean there is no risk.  The credit default swaps on U.S. Treasuries would become quite a bit more expensive, but nobody thinks we don't have the resources to pay our debt.  (Some unknown derivatives linked to the dollar could "blow-up," but all we can do is be prepared to sell quickly, if that is the case.)

I'm now in the uncomfortable position of hoping the shutdown continues long enough to make it certain the debt ceiling will be raised before default can occur.   Now, let us pray . . .

Another 1 - 2 Punch

As if today's government shutdown was not enough bad news, watch out for Italy.  Sore-loser Silvio Berlusconi, who hasn't been funny since his famous "boom-boom" comments, looks like he is pulling out of the ruling coalition.  He just ordered five cabinet ministers to resign, who promptly did as told.  This is just what Italy and Europe don't need.  The Italian stock market is down sharply, and their interest costs are rising rapidly, which is critically important.  If he must go to jail, this ego-centric and egotistical politician appears willing to take his country down with him.

The shutdown doesn't worry me.  A collapse of Italy does.  Failure to raise the debt ceiling scares me!

What Shutdown?

Imagine sitting in a high-powered car in the parking lot of a school when classes are dismissed for the day and putting the car into Drive just before jumping out.  Imagine giving Roman Candle fireworks to teenagers living in a shantytown.  Imagine being in a large crowd and firing hundreds of rounds from an AK-47 straight up.  In each case, it is unlikely to have a good ending.

That's how I think about a debt default, if Congress does not raise the debt ceiling within the next thirty days.  All sorts of bizarre scenarios are possible, and none of them are good, at least in the short run.

Certainly, the stock market will drop, as uncertainty increases.  Certainly, the cost of credit default swaps on ALL U.S. bonds will increase, driving down the market price of those bonds, which increases interest costs to taxpayers.  Certainly, the dollar will fall, as investors attempt to decrease their exposure to a dysfunctional government.  Certainly, the price of oil will drop as future demand can be expected to drop.  Certainly, gold will increase, because it is the last bastion.

While we do know this much with great confidence, we don't know how severe the reaction will be, nor how long it will last.  Many nations have defaulted on their debt before, but no nation with a reserve currency has ever defaulted.  The dollar has been the world's only reserve currency since the end of World War II.  (In fact, the U.S. used its dominant position as victor, some say unfairly, to require Europe's international contracts be expressed in dollars, insuring supremacy or reserve status of our currency.)

Besides credit default swaps, other types of derivatives scare me the most, since they are not traded on any transparent exchange.  This is part of the Dodd-Frank bank reform that is still not implemented, due to stonewalling by the industry.  Nobody, and I mean nobody, knows what is out there in derivative form.

Once we default, we will set into motion a great many things we cannot control.  With great respect for the highly innovative Ben Bernanke, not even the mighty Fed will be able to insulate us.  That is why I expect the stock market to trend down for the next two weeks, at least.  If you are an income investor, you can probably expect a big paper loss but no change in income.  If you are a growth investor, you can expect some great buying opportunities ahead.  But, be prepared for sudden, violent changes.  Only high frequency traders, who trade in milliseconds, will benefit from all this.  Long-term investors will eventually be fine, except long-term may become longer-term.

Congress has been frequently accused of protecting Wall Street instead of Main Street.  That is certainly not true now, as they are NOT protecting investors from a debt default!  Wall Street will be harmed quickly, but Main Street will have time to adjust.

And, no, I'm not interested in the government shutdown.  That is so unimportant, compared to a default on U.S. government debt.  Depending on your politics, you may be happy or sad that -- the longer the shutdown, the stronger the President's hand in demanding the debt ceiling increase.  I don't care who "wins," as long as there is no default.

Wish I Had Said That . . .

"The primary function of sports is to provide advertisers a way to sell beer and unhealthy stuff to losers who  go to sports bars and pretend they have friends."

OK, that's definitely an ouch!  But, it does hint at the importance of advertising, which is widely ignored in economic theory.  Economists like to talk about consumers (and investors) making informed decisions in their own self-interet and ignore the fact that consumers will NOT always act in their own self-interest, because of advertising.

In Praise of Imperfection

Long ago and far away, I used to teach a junior level course at the University of Texas at Arlington called "Economics of Money and Banking."   During that course, I would teach that the risk/reward principle (higher risk deserves higher reward) applies to the pricing of loans as well.  That explains why a successful doctor might get a car loan at 8%, while a person with two bankruptcies on their credit report might pay 18% for a loan on the same car.  That is largely still true.

In a perfect world, or at least the world before 2008, that would be true for governments as well.  When Congress was dysfunctional over the debt ceiling in 2011, I didn't really think the Republicans would allow a default, because we cannot afford to pay more on our enormous national debt.  Remember, a 1% increase in our debt service on $15 TRILLION debt (2011) would be additional spending of $150 BILLION, which digs our hole even deeper.

There are no moralist overtones here.  Bad credit doesn't pay a higher rate of interest as punishment.  They just need to pay more to entice somebody to loan them money or buy their bonds.  If we prove ourselves either un-creditworthy or un-governable, buyers of Treasury bonds will naturally shy away from us and not buy our Treasury bonds,

However, even though we lost our AAA credit rating, the interest rates we pay did not increase.  Why?

In our imperfect world after 2008, Ben Bernanke and the Fed came to the rescue by buying our bonds, which is called quantitative easing.  If some buyers of Treasury bonds shied away from us, the Fed would simply buy those bonds.  In other words, the demand of our bonds or debt did not decrease, and we didn't have to pay more in interest cost to sell them.  Because of this, we have paid much less in debt service than we deserve..

Nobody knows how long this can continue, as the Fed's balance sheet has grown geometrically.  But, the sooner we stop, the sooner we can stop begging the question.

For the past two weeks, the stock market has been factoring in a government shutdown and now expects a shutdown on Monday to happen.  The market will drop on Monday but not frighteningly so.  It will continue to drop each day until the end of the shutdown becomes clear.  However, the market has not factored in a default or failure to lift the debt ceiling.  It still expects a deal.  If the market is wrong and the government actually defaults, we can expect a rush for the exits and a big drop in stock prices.

Like most riveting arguments, both sides are right.  The President is right that no president should have to deal with a Congress for permission to pay the bills Congress has approved.  The Republicans are right that every tool must be used to restrain entitlement spending.  Because the President has already indicated some entitlement reforms he would accept, such as chained-COLA increases, I pray he will offer those entitlement reforms and cost savings now in exchange for permanently ending the harmful charade of debt ceiling negotiations, thereby sparing future presidents, both Republican and Democrat .  And, I pray the Republicans would accept that.  But, of course, both sides would find that solution imperfect!

I regret NOT teaching years ago that the world is NOT perfect, and that imperfection MAY not be all bad.

Not Evil ?

President Reagan never referred to Goldman Sachs as "the evil empire" but some of us think he could have.  He was referring to the old Soviet Union, not the giant investment banking firm that is too-big-to-fail, unfortunately.

Nonetheless, their research is good, and here are their most recent predictions:

1.  GDP growth will be 1.6% this year but a whopping 2.9% next year.
2.  Unemployment will drop to 6.6% by the end of next year.
3.  Core inflation will remain flat.
4.  The S&P will end this year at 1,750 and next year at 1,900.
5.  Gold will fall to $1,050 by the end of next year.
6.  The euro will strengthen and the yen will weaken.

I'm surprised they don't charge a fee for their predictions . . . ??

Less European Uncertainty

Missing another bullet, the stock market is relieved that Angela Merkel's political party did slightly better than expected in the German elections, maintaining a steady hand at the top for another four years.  If she had been repudiated by the German voters, the market would be suffering badly today.

The only hiccup is that her coalition partner was repudiated, meaning Merkel will have to rebuild her coalition.  This shouldn't take more than a month, but it is now safe to assume the primary savior of the Euro will become the primary savior of Europe.

There is a famous line in J.R.R. Tolkien's Hobbit trilogy that "there will be one ring to rule them all."  A recent cover of prestigious magazine The Economist shows Merkel standing on a lone pedestal column with the title "there will be one women to rule them all."  Merkel is now the de facto leader of all continental Europe.  She is the most powerful woman on Earth!

Short-term, this means it is likely that she will continue to bail out southern Europe with the resources of Germany.  (Be thankful!)  Long-term, it will be interesting if any leader of a strong economy, who enforces austerity on other nations, can begin the unpopular process of enforcing austerity on her own country.

Unemployment in Germany is now at a two-decade low.  Enjoying a juicy level of expensive entitlements that only a strong economy can afford, it will be interesting to see how Germany sustains those entitlements with an aging population that is actually decreasing in size, a result of a low birth rate and lack of immigration.  If Merkel wants to build a legacy, she will have both to save Europe and to bring austerity to Germany.

For the present, investors should just thank the voters of Germany for "saving" Europe by saving Merkel.

Guns and Lunatics

I like guns.  I own several.  I even have my father's old shotgun.  I am very experienced with them.   I also have a concealed weapons permit and usually carry one in my car with me.  I feel safer with guns than without them.  And, I genuinely think other people around me are safer because I have guns.

While I am probably a gun-lover, that does not mean I am a gun-nut.  I strongly believe in background checks before purchasing a gun and other reasonable safeguards.

Now, the juxtaposition of two news stories this week has made me think more about this.  First was obviously the tragedy in the Washington Navy Yard.  Some people just shouldn't have guns.  Second was an op-ed column in The Virginian-Pilot about funding for mental health in this state.

Following the gun tragedy at Virginia Tech in 2007, the state legislature wisely increased mental health funding $42 million, basking in the glory of doing the right thing.  Under cover of budget restraints, they then reduced it by $37.7 million in the dark of night.  At this point, we have the same number of state psychiatric beds as we did in 1850 despite the huge increase in the total population.  Is there no shame to having our mental health system graded as a D by the National Alliance for the Mentally Ill?  We wouldn't accept such a lousy education system.

Maybe, we need an identified funding stream for the mentally ill?  Since we gun-lovers insist on giving guns to every lunatic who wants one, we should bear some of the cost of caring for the lunatics by paying an extra tax on the sale of firearms, magazines, and ammunition.  Economists like to talk about "elasticity of demand" or how responsive is demand for a product to a change in price.  As a example, does the demand for cigarettes go down when the price goes up?  Surprisingly, no!  I suspect the demand to own guns is also inelastic or unresponsive to any change in price or tax.  Gun sales will not drop, and funding for mental health services will improve.

Besides, while the dollars raised to fund mental health are important, it is also important to more firmly link guns and mental health.  We gun-lovers should not ignore that relationship!

So, tax me . . . please!

September 29, 2008

That was the date the House voted down TARP, a $700 billion nation-saving economic bailout (which was fully repaid with interest).   As the House voted, I watched the Dow lose a heart-stopping 777 points.

I thought about that yesterday as the House voted on the budget to kill ObamaCare.  The futures market indicated the Dow would lose a mere 30 points at the open, which it did.  (It normally has a down day after reaching a new market high.)  However, as the House voted, I watched the loss increase to 120 points.

In fairness, the Dow lost about 185 points by closing, but some small part of that loss must be attributed to Friday's quarterly "triple witching" which makes the market unusually volatile.  (This will be explained in a future blog.)  But, it caused none of the 90 point loss suffered as the House voted.

The market was reminded yesterday that, if Congress must choose between losing the purity of their ideology or losing yet another credit rating, it cannot be trusted.

After surviving the Fiscal Cliff, after avoiding the annual European collapse this year, after anguishing all year over the GDP growth rate of China, and after reaching a new all-time record high despite all the headwinds this year, the stock market now faces another new drive-by shooting by people trying to help us . . . or at least help their own reelection.

Forever the optimist, assuming the German election doesn't produce any ugly surprises next week, I do think the stock market will suffer the next few weeks before rallying into the end of the year.

Maybe, we should just stop televising House votes . . . ??

Spare The Rod . . . For What??

Marshall Gore woke up in the cell on death row in Florida earlier this month, knowing it was his last day on Earth, as he would be executed that night.  Imagine the absurdity he felt when he learned he would be allowed to live one more day, so that the state Attorney General Pam Bondi could attend a political fund-raiser.

That was my feeling yesterday when the Fed announced they were not prepared to begin tapering the quantitative easing, which is the purchasing of $85 billion in government and mortgage-backed bonds every month.  The economy is not so weak it could not survive a $10 billion decrease.  The stock market was fully prepared for it, as the 147 point relief rally in the Dow proves.

It was time for the Fed to start unwinding a successful program before it does actual damage to the American economy by igniting inflation.  Unfortunately, the Fed blinked.  Interest rates fell, the dollar sank, and gold soared,  The likelihood of inflation just increased by some percentage.  If Janet Yellen does take Bernanke's place, as expected, the likelihood of inflation will again increase.

We also need to get the Fed out of the stock market.  Their actions whipsaw the market with every comment they make.  Analysts then ignore business realities, like earnings, growth rates, management changes and so forth, focusing instead on the Fed.

Some pundits think Bernanke postponed tapering because he knows the economic damage from a government shutdown next month would only be aggravated by tapering ahead of it.  Maybe?

While I religiously avoid discussing anything even remotely religious, I would remind the Fed of the wisdom in Proverbs 13:24, which states "whoever spares the rod hates their children, but the one that loves their children is careful to discipline them."

A Fat Lady Sings Tomorrow

For the last three months on Wall Street, the most important guessing game has been -- when will the Fed reduce quantitative easing (QE) and by how much?  The guessing game started immediately after the Fed's Open Market Committee (FOMC) last quarterly meeting, when Bernanke used a press conference to telegraph their intention to "take the punch bowl away from the party."  The stock market promptly threw a "taper tantrum," losing around 500 points in the Dow, as nobody really knows how dependent the bull market has been on QE; thus increasing uncertainty.

The FOMC's quarterly meeting begins today.  Tomorrow, they are expected to end this guessing game.  The stronger the economy, the more likely they are to reduce QE.  Recent economic data has been mixed as usual -- but mostly positive.

The weaker inflation, the more likely they are to reduce QE.  Inflation data released just this morning show inflation weaker than expected.

Bernanke's term ends in January, and he wants to begin the tapering before he leaves.  He seems to feel he got us into QE and would like to start getting us out.  (Of course, if the economy weakens afterwards, they have promised to increase the amount of QE at that time.)

The stock market has already priced in the decision that the Fed will being tapering this month by $10 billion eacg month, with 75% of that decrease in the amount of Treasury bonds they buy in each month and 25% of that decrease in the amount of mortgage-backed-bonds.  This ratio allows them to start weaning off Treasury faster than the housing market, where mortgage credit still retains a stranglehold on the home market.

If the FOMC delays tapering, I expect the market to rally.  If they taper more than $10 billion a month, I expect the market to weaken.

Then, the most important guessing game will be . . . what will the FOMC announce after their next quarterly meeting?  And, another fat lady will have to sing then.

It also shows how difficult it is, when the government is such a huge player in the economy, for the stock market to function like a stock market, which worries mostly about company earnings instead of monetary policy.  While I think Bernanke did a heroic job of preventing an actual depression, I'll be happy when they are finished saving the world.  Maybe, we can then get back to the textbook stock market we have studied for so many years.

Larry Yellen or Janet Summers

Names are not important.  Thoughts, words, and policies are.  The surprise announcement that Larry Summers was withdrawing his name as a candidate for Chairman of the Federal Reserve, replacing Ben Bernanke, leaves the door open now for Janet Yellen to become the first female Fed head.

Appointing the head of the Federal Reserve is one of the most important appointments Presidents make. President Obama was reportedly backing Summers, as they had worked together closely during the darkest days of the global financial crisis.  Advantage:  Summers!  Yellen is currently Vice Chairman of the Fed.  Both are brilliant economists and intimately familiar with the details of the Fed.  Advantage:  Yellen!

Popularity played a bigger part in this drama than I have ever seen in choosing a new Fed head.  Yellen was considered a conciliator, who was thoughtful and gracious.  Summers could be expected to tell a U.S. Senator he was stupid, which makes great television but is not helpful.  Summers claims he withdrew his name because so many members of Congress have already promised to vote against him.

But, it is ironic that Republicans lined up against Summers, because the choice was not a question of economic brilliance, nor a personality issue, not even a male-female issue.  The real choice is between a hawk and a dove, relatively speaking.  Republicans blocked the hawk, the more conservative choice.

Summers, who grew up in an extended family of Nobel-winning economists, is more hawkish than Yellen, which means he would end quantitative easing or the buying of Treasury and housing bonds sooner and let interest rates rise faster.  Yellen is more dovish, which means she will taper more slowly and keep interest rates lower for a longer period.  Because Wall Street is nervous about the tapering of quantitative easing, stock markets around the world are giddy with joy that Summers withdrew.

My thought is that since both Summers and Greenspan were so instrumental in the deregulation of derivatives, neither should ever be or have ever been Chairman of the Federal Reserve System.  Both argued that derivatives are self-regulating, and they are . . . until they aren't!

Reader Reactions

Yesterday's blog noted the list of serious worries has dwindled over the past year.  One reader questioned why there was no mention of the tapering problem.  Briefly, the Fed is now buying $85 billion worth of Treasury and housing bonds each month.  This has been very good for the stock market, obviously.  Three months ago, Bernanke suggested the time to decrease the monthly buying was coming to an end, and the stock market promptly had a "taper tantrum," causing the lull we saw this summer.  Next week, it is expected to begin, with the Fed decreasing its purchases from $85 billion to $75 billion.  There is fear that this could let the bear out, creating stock market losses.  I didn't include this as a serious concern, because it has been a concern for only the last three months and, more importantly, because it is already priced into the market.  Of course, if the Fed reduces the monthly purchases from $85 billion to only $50 billion, you can expect the market to react negatively . . . but the Fed won't do that!

Secondly, one reader took issue with my repeatedly referring to members of Congress (and Administration) as "elected children" who demand everything be done their way.  Maybe, the problem is not the immaturity of the legislators (agreed), nor the gerrymandered political districts (which I do believe).  Maybe, it is a structural problem.  Here are his comments, and I couldn't say them better:

I heard on a recent Fareed Zakaria CNN show several "experts" talk about how on both the national and state levels there seemed to be enough space between the politicians and the citizens that real gridlock could result.  At the local level, however, the politicians were often so close to the issues they were dealing with that practicality could prevail and something constructive could be done.

Maybe the problem isn't gridlock or "this Congress."  Maybe it is that too many problems are being addressed at too high (distant) a level.  (That isn't to say that there are not some problems that really must be addressed at the broadest level.)

I believe many business people believe that once a plant gets to be beyond a certain number of employees that something fundamental changes.  I think the same applies in other places - think high schools.  Maybe we would all be better off if there was less governing and legislating and the people in Washington (and Richmond) spent more time at those cocktail parties where they could actually get to know one another.

That is good old-fashioned, but currently unfashionable, Reagan Republicanism.  All I can add is . . . amen!

Whittling Worries Away

Every Wall Street analyst knows the stock market normally falls during the Fall, with Septermber/October being particularly ugly before rising at year-end.  This year, however, history may not be a reliable guide to the future.  After a lousy August, September has already gotten off to a great start.  Why?

Have corporate earnings suddenly improved dramatically?  No, they continue to grow nicely, even though the rate of increase is slowing, due to the Law of Large Numbers.  The U.S. economy is still "the little engine that could" and continues sputtering upward.  But, something must have changed to explain this bull market?

Remember this time last year.  We were living in terror of the Fiscal Cliff, another European collapse, and a severe recession in China.  Since then, we somehow avoided falling off the cliff.  Europe calmed down, with bond yields dropping nicely.  And, there is plenty of evidence the Chinese economy will pick up steam.

The terror of the Fiscal Cliff has morphed into terror of the debt ceiling negotiations, but Wall Street believes "the fix is in."  Over in Europe, Greece probably needs another bailout and Italian bond yields have started increasing again, but Wall Street believes Merkel's re-election is secure.  In China, the debate is not about recession but whether their GDP will grow 4.5% or 7.5%.  Importantly, it is now clear China is actually revamping its economy, not just talking about it, from an export-driven model to a consumption-driven model, like the U.S. and European economies.

It is often said that Wall Street always faces a "Wall of Worry."  That is their job, i.e., to be worried.  But, it looks like the worries are being whittled away.  They will never be eliminated, as we must always worry  about the future.  But, Wall Street seems to have lost its fear . . . temporarily.

Of course, if we get sucked into Syria, if Congress prefers a credit downgrade to expanding health coverage, if Berlusconi tries to take Italy alonog down with himself, we should expect a severe sell off . . . and then a gradual recovery . . . again.

Personally, all other short-term worries are manageable at this point . . . except for the elected children in Congress.  After all, it is my job to worry!

Sound of Silence

I love my wife!  Yes, I know that is a bizarre way to begin a blog.  Of course, after the next sentence, every husband knows why I opened with . . . "I love my wife."

When she informed me she was going to Houston to see family, my first thought was serenity, and I started making rules for my highly anticipated alone-time.  First, television was limited to one hour of news daily.  I broke that rule, just by going to the gym, which has televisions everywhere.  Then, I found out the Cowboy game was televised Sunday night.  First rule clearly broken!

Second, I was going to concentrate on my next book by studying some new books on "human finance" but they didn't arrive on time.  So, I only worked on it a little.  Second rule partially broken!

Third, I was going to be reclusive, avoiding human contact.  I saw lots of people at the gym but talked with no one.  But, the nice people at Subway who prepared my tasty dinner both Saturday and Sunday nights asked me several questions, and I ended up talking with them.  Third rule too stupid not to break!

I guess that making bachelor rules is not in my skill set.  With all due respect to Simon & Garfunkel, the Sound of Silence can be over-rated.  They were smart not to call it the Joy of Silence.

She'll be home tomorrow, and the silence will be gone . . . and that's just fine!

Over-Thought And Over-Wrought . . . over nothing

Have you heard the joke about the existentialist who says to his doctor "I have liver disease."  The doctor asks "how can you know that, since there is no discomfort of any kind with liver disease?"  The existentialist replied "I know, I know, those are my exact symptoms!"

OK, OK, nobody ever said that existential humor was funny.  So, imagine my curiosity when I read that Hollywood actually produced an existential comedy.  I've seen lots of existential movies, like Apocalypse Now in 1979 or Leaving Las Vegas in 1995.  But, I could not imagine an existential comedy.  It is titled I Heart Huckabees.  But, with Dustin Hoffman, Lily Tomlin Mark Wahlberg, Jude Law, Naomi Watts, and Shania Twain, why wouldn't I watch it??

One of the most popular tenets attributed to existentialism is that every person is an island -- removed and cutoff from the rest of humanity and the world.  Jumping from that tenet, the movie shows the faux debate between "everything in the world is connected" . . . and "everything is atomized, random,and chaotic."  Obviously, both positions are both correct and wrong simultaneously.  But, the movie's humor is about the struggles of everyday people trying to deal with weighty subjects.  It is surrealistic to think everyday people even care about, much less struggle with such issues, and, believe it or not, that actually becomes quite funny.

Because I expected the movie to be nothing more than some amusing intellectual fluff, I thoroughly enjoyed it.  But, would I recommend it for others?  Well, no . . . unless you're an existentialist.

Certainty Denied !

Friday's Jobs Report was widely anticipated.  Wall Street was holding its breath.  It has been tying itself into knots worrying that the Fed was about to "take the punch bowl away" or start tapering quantitative easing (QE).  A good Jobs Report will be the trigger to start this tapering or reducing the amount of QE each month.

To refresh your memory, QE is when the Fed purchases bonds issued by the Treasury Department.  Because this increases the demand for those bonds, they are easier for the Treasury to sell the bonds at lower interest rates.  This has been a primary tool for the Fed to keep interest rates low.  If the Fed tapers or reduces its monthly purchases of Treasury bonds, then the Treasury will have to issue those bonds at higher interest rates in order to sell them.  So, beginning any reduction in monthly purchases by the Fed equals the beginning of interest rates increasing.

All of this was in the back of Wall Street minds on Friday, when the Department of Labor announced 169 thousand jobs were created last month.  The market was expecting about 175 thousand, so that was close enough for economists, but not Wall Street.  If it had been 200 thousand, the Fed would be tapering soon.  At 150 thousand, the Fed would not begin anytime soon.  At 169 thousand, it was not too hot, not too cold -- just perfect for Goldilocks maybe, but not Wall Street, which craves more certainty.

Coincidentally, Wells Fargo just released some interesting research on jobs.  It confirmed the widely held belief that most of the jobs being created were the low-paying jobs.  However, it also found that average real wages for the low-paying jobs was still dropping despite rising job creation.  Further, it found average real wages for high-paying jobs were rising fast despite weak job creation.  Certainly, increasing wage disparity is not good for what remains of the middle class, but nobody ever said capitalism was not cruel, only that it is efficient.

This rising income disparity tells me that the long-term unemployed have lost marketable job skills and will take whatever pay they can get, while businesses cannot find enough people to hire for high-paying jobs and are paying their current employees better to make sure they don't leave.  That's efficient, isn't it?

Anyway, the Jobs Report is issued at 8:30 AM on the first Friday of each month.  Wall Street will be holding its breath again on October 4th . . . so will I!

In the meantime, the Fed meets again next week, and who knows what they'll do?  That's the problem!

Losing Sleep Over Syria ?

Interestingly, I have received a surprising amount of feedback that yesterday's blog, which listed my concerns for the market this Fall, did not include anything about Syria.  The reason is that I don't expect anything to happen, i.e., that the U.S. will not attack Syria.

I wish the President had immediately lobbed a couple of dozen Tomahawks into Assad's back yard and then apologized for his haste later, before his political opponents got organized and the very real counter-threats from other countries could develop.  Unfortunately, that didn't happen, and it is too late now.

The President will be weakened politically in the U.S., but his Nobel Peace Prize will shine even more brightly abroad.  (Like his Democratic predecessor, Bill Clinton, he will always be more popular abroad than here.)  When Assad massacres more women and children, as he certainly will, Obama will be in position to remind us, both here and abroad, of his moral outrage.

However, I am somewhat concerned that his resulting weakness here will cause the Republicans to over-reach during next month's debt ceiling negotiations.  That would be unfortunate for all of us!  The President's moral indignation is probably quite high now, following his embarrassment over our impotent response to the last Syrian massacre, and this might make him more difficult to negotiate with.

If I am wrong, the market will drop dramatically, e.g., several hundred points on the Dow, as soon as the market believes a strike is certain.  That will be a great buying opportunity.  Of course, it would be a better opportunity if . . . oh, yeah, we still have gridlock . . . never mind.