OVER THE EDGE? - LESSONS FROM THE FED

COMING DOOM
We are going to hear more about more about the fiscal cliff and how it will bring the country to its knees.  In reality the fiscal cliff should be a great opportunity for both parties to achieve a level of success and implement a long-term strategy for fiscal and economic success for our country.

Unfortunately our elected officials don't live in reality and the election results suggest to the President that raising taxes is the course the people have demanded.  On the other hand, Republicans, spurned by voters will hold fast their fidelity to the "producers" and attempt to keep taxes low for the highest income earners.

Truthfully, no outcome will really work as the politician's plans for 10 year deficit reduction and projections about reigning in spending are all simply made up accounting garbage.  The healthcare mandate alone will have cost overruns well beyond anything estimated and our other entitlements won't fare much better.  Despite this truth, our politicians aren't in the business of taking serious aim at real issues, they are in the business of dividing and wrangling for a small victory on a meaningless issue to be able to say to their special interest that they got something for them.

WWFD?
So why is this important?  As odd as this seems after writing the text above, I'm pretty convinced that the Dems and Repubs will do exactly what the Fed would do and do more of what got them in this mess in the first place.  Since we know that the Fed's response to all negative news and all empirical data that shows that what they've been doing hasn't helped is simply to do more of their devaluation and do it in bigger size, we can guess that Congress and the Senate will do exactly the same!

The solution is not to fix anything or change structurally any spending or tax course, it will be to simply defer entitlement cuts and agree to raise tax rates slightly.  The grand bargain will allow both sides to win and will damn our country to lose.  The country's loss won't matter though because both political sides will be able to crow to their supporters that they did what was best and achieved a great deal.

This non-solution course will buy time and isn't that what leadership is all about?  Look at the ECB as it deals with Greece.  Look at the Fed dealing with banking solvency.  Look at our President in dealing with Middle East issues.  The problems are so big that leaders simply work to defer the day of reckoning as often there is no other way to handle the massive problems.  As we know though, if you lie and put off recognition of issues they often become unmanageable and can't be handled in a fashion that limits damage.  After years of Presidents and Congressional leaders putting off the tough issues, we are about to see just how out of control they are.  The incredible $1 trillion deficit spending we've had over each of the last 4 years has only brought the issue to the top of the heap, these issues were there already, they just can't be put to the side like they have been so often before.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/    

WHAT DID THOSE FINANCIAL TERRORISTS GET?

$3,850,000,000,000

As we come to the end of the debt ceiling debacle for 2011 and 2012 it is important to highlight what our fine leaders and representatives accomplished for us hard working folk.  I only want to highlight the key points and I'll add some thoughts below the summary.  In addition, I'll talk about market direction in the TRADING UPDATE section.

DEBT CEILING HIGHLIGHTS -

• The compromise allows the debt ceiling to increase by as much as $2.4 trillion dollars in total. Included is an immediate increase of $400 billion dollars. President Obama would be permitted to request another $500 billion increase in the coming months, which Congress could vote to disallow by a veto proof two-thirds margin. A further increase of between $1.2 trillion and $1.5 trillion would be available after a special committee identifies matching levels of additional spending cuts.
• The agreement calls for cuts of more than $900 billion over ten years in spending from programs, agencies and day-to-day spending. It would include security-related and non-security-related cuts. According to the Congressional Budget Office, "discretionary" spending would be decreased by $21 billion in 2012 and $42 billion in 2013.
• The agreement creates a 12-person House and Senate special committee to identify further spending cuts. The committee must complete its work by Thanksgiving - November 23 - and Congress must hold an up or down vote on the committee recommendations by December 23. The committee could overhaul the tax code or find savings in benefit programs like Medicaid, Medicare or Social Security. Congress could not modify the committee's recommendation.
• Should the special committee deadlock or should Congress reject the committee's recommendations, then automatic across the board spending cuts of at least $1.2 trillion would go into effect.
• The agreement requires that the House of Representatives and the Senate vote on a Balanced Budget Amendment to the Constitution, although its passage is not guaranteed.
• The deal also includes changes to Pell Grants and student loan programs. Pell Grants will receive a $17 billion increase for low-income college students, which will be financed by the elimination of subsidized student loans for most graduate students

Ok, here's a little refresher before we get started.  The 2011 budget is slated to be a total of $3.85 Trillion and of that it includes borrowing almost half of the sum to meet those requirements.  That borrowing represents a $1.65 TRILLION deficit.  Stated another way, we are spending almost double what we are bring in.

OVERVIEW -
I'm fine with bullet one where they parse out the amounts over time.  Clearly the President got what he wanted which was a deal to get him through the 2012 election cycle.  Hasn't the guy ever heard about serving the public?  Who cares about the election, fix the problem!

Cuts of $900 Billion in ten years are a complete farce.  There are so many problems with the approach that these clowns took with this deal it is simply appalling.  First 2012 and 2013 cuts amount to around $70 Billion.  These are cuts that likely will happen, but amount to about 2% of the freaking budget!  Who runs a budget like this?  In other words, this $900 Billion is a complete joke.

The Special Committee is something that I feel is dangerous.  While I like the idea of a group getting together to actually work AND having their ideas implemented, it is dangerous in terms of who will be on the committee and who won't.  Effectively we already know that to be considered for the committee you must  have voted "YES" for the debt ceiling agreement.  That means that many of the fiscal conservatives in Congress will not be allowed to participate.  Ron Paul and others that actually vote based on conviction will be excluded, and he is exactly the one person that should be on the panel.

I do like that cuts will be enacted and if not, across the board cuts will come.  This is REALLY what has the Democrats shaking in their boots.  If the Republican caucus really wants to find cuts they can simply vote the recommendations down and the hammer will come.  Of course we all know that the Republicans talk a good game but don't really have a real desire to change anything so we'll see some other compromise that will keep the status-quo going for a little while longer till the house of cards completely implodes.

The Balanced Budget piece has no teeth.  It is interesting that almost all politicians say that they want a balanced budget, but somehow it never gets put to a vote.  My guess is that we'll have about 99% absenteeism on the day that vote is held.  That issue is one where everyone likes to affirm it, but no one wants it really.  If we had a balanced budget amendment, the government ponzi scheme would face limits and that can't be good for anyone that derives power from an unlimited and insatiable government.

Finally, the Pell Grant thing is also pretty laughable.  We are going to continue down the road of getting our young folks all going to college so they can get in line with the other unemployed folks with useless liberal arts degrees.  I actually would support this measure IF and only if Congress required these students to self-fund their expenses until they actually received their degrees (yes loans, working, etc) to make the cost to taxpayers riskless.  Second, the government Pell grants would only reimburse students that earned degrees in engineering, science, and other hard-core programs that were technical in nature.  Upon earning degree AND working for 2 years in the field the Pell grant would pay off or reimburse a student for books and tuition up to a maximum amount.  This would ensure that the taxpayer only pays for success and doesn't pay for Jimmy to "find himself in college" and also makes sure that the graduates that earned the degrees are employable contributors to society.  While it sounds tough, too bad.  WE HAVE ENOUGH UNEMPLOYED LAWYERS, LIBERAL ARTS LOSERS, AND DROP OUTS in this program, enough is enough.  It is our money and it is time to demand responsible stewardship of it.

And yes, all of those scientists could work to create the next generation of these (see video below) which just happen to be some of the coolest planes ever.  I really put them here to show you what $1.5 Billion will get you.  Now contemplate this, you could buy 650 of these awesome flying wings for just under 1 trillion.  My guess is that when all is said and done, we won't have anything to show for our use of $1 trillion in deficit spending this year, so if I have to spend an extra trillion or two I'd rather have the B-2s.

WHO WON?

My first take on this deal is that the Democrats won.  Yes the media is howling and stating that the Republicans won and the Tea Party members are terrorists, but that is foolish.  The Republicans caved just like I said they would.  Essentially they could have gotten anything they wanted if they were willing to push things to the limit, they weren't.  The President gets to push this issue out past 2012 so he can concentrate on the election and continue telling everyone that he inherited a financial mess.

While the Tea Party may have scored some points by getting the balanced budget onto the map and even getting the special subcommittee to make cuts, they have allowed themselves to be characterized as a radical fringe group of nut jobs willing to take down the USA to accomplish their goals.  They need to be more forceful and vocal stating that they love this country and that the politicians on the left and right simply are part of the political class that could care less about the nation and its people.  They must state this emphatically every time and demand recognition that the past policies of Bush and Obama are failures and don't work.  The liberals hate the Tea Party and attempt to label them and marginalize them in order to attempt to make others discount them.  It has worked so far, but they must fight on.

Unfortunately Republicans are the the guys that are attempting to play the game of politics the best.  You can see it in the old veterans.  They are loving having a "bad cop" group that they can blame for being on the fringe and then they can go to their constituents and blame the liberal left.  They proudly sit in the middle playing both sides off each other.  I can tell they believe that they will rise to power in 2012.  The problem is though that many of us recognize this game and the time for life-long politicians is waning.  We need leaders that make hard choices and choose the side of long term financial strength for our country rather than another election cycle victory. 

Here is a list of those that voted for and against the bill in Congress -

Here is a list of those that voted for and against the bill in the Senate -

I will do a trading update this evening.  Please drop by again to view this post.  http://www.goatmug.blogspot.com/

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

WHY TELL THE TRUTH WHEN YOU CAN LIE? (US TREASURY & THE FED)

SAME STORY, SAME LIES
If you read economic news long enough you will start to see the same tired story spun the same way over and over and over again with little variation.  This is especially true when listening to the President, CONgress, the Fed, and the US Treasury.  It is not surprising to see this because people (leadership) tend to give the people what they want to hear rather than what they need to hear.

Think about it.  We have an government that is spending in an out of control fashion like a shopaholic, we have a deficit that is greater than $1 Trillion more than we take in, we have hit the demarcation point where Social Security and Medicare are spending more than they take in, we have a Federal Reserve that is buying our own debt keeping rates so low older people can't earn enough, we have exceeded our self-imposed government debt limit, and we have a banking system that is really insolvent.  Have you heard any of this stuff really discussed in an open forum or seen the leadership come forward and propose a real plan that is thoughtfully considered? 

The answer is no.  Even President Obama has completely ignored every single recommendation that his own budget deficit reduction panel provided.

TWO GOOD ONES THAT EVERYONE LOVES TO HEAR
So, it is odd to see someone other than fellow bloggers generate a post or article that states something other than the normal bilge of conventional wisdom or sound bites.  Today, I found one piece that actually stuck out, because it flies directly in the face of what we hear from Treasury Secretary Timothy Geithner.  In fact, recall that every single time Tim Geithner speaks he states several lies over and over again.  Here they are;

1)  The USA believes in a strong dollar policy!  HAHAHA!  Remember when he said this in Beijing and the Chinese business students simply laughed out loud in his face?  That was one of the funniest common lies.  We Americans are either too polite or too stupid to do anything but nod our heads when he says this to us. 

(Totally unrelated video, but really funny considering these are the folks that are laughing at our Treasury Secretary!  Oh and by the way, don't click the video when it gets going, I have no idea where it will take you)
2)  Mr. Geithner also is fond of telling us that China is bad and that their currency is undervalued.  In other words, we are looking for a scape goat to complain about our trade deficit and this one has been an easy one to throw out there, because Americans are all about "Good Guys" and "Bad Guys".  (Don't get me wrong, those Communist Chinese are bad guys, but that is not the point of this post).  When Geithner says, "Chinese are bad", we all pile on and clap and howl and scream, and CONgress does the same thing too.

WHO LET THESE GUYS WRITE THIS STUFF?
Given that Geithner loves to throw these two out, I found it remarkable that the St. Louis Fed wrote a one page note stating that in fact, that perhaps it wouldn't be a great thing if China did actually revalue their currency higher.  They mentioned that the yuan had actually increased in value by almost 25% since 2005 and yet it did nothing to stall the increasing trade deficit with the most populous nation in the world.    Further, if we did have a Chinese currency that was valued higher, WE IN THE USA would have a HIGHER INFLATION RATE!  In other words, things would be much more expensive if the garbage we buy from China cost more (via an appreciated and more expensive yuan). 

http://research.stlouisfed.org/publications/mt/20110601/cover.pdf?utm_source=Twitter&utm_medium=SM&utm_campaign=Twitter

(Go ahead and read it, it's 1 page!- make sure that you right-click and open in a new window though!)

Yes, that is the take away, while we've simply swallowed the trash that our leaders provide to us, we often never question the extent of their understanding or their ability to actually tell the truth.  The St. Louis Fed says that we'd have more inflation here.  But beyond that, you know what would really happen.  If China appreciated their currency we'd have importers and businesses going to Thailand, Malaysia, Vietnam, and every other 3rd world poverty stricken country looking for cheap labor to replace the suddenly more expensive junk from China.  I guess that then Geithner could complain about those countries and their terrible trade policies and deficits huh?

Ultimately, Mr. Geithner, The US Treasury, The Fed, CONgress, and the President don't want to address the real issues, we want to point fingers at others and sink our heads in the sand.  The St. Louis Fed document is interesting, but certainly is something that won't be repeated in interviews or Sunday morning talk shows.  It is far easier to blame others and refuse to address real issues.

WHO WROTE THIS? - NICE DISCLAIMER!
Oh yes, it didn't escape me that the authors of the paper just happen to have interesting sir names, perhaps these folks went off the reservation or we'll soon find that Chinese spies have even infiltrated the highest ranks of the Federal Reserve system.
(Mingyu Chen and Yi Wen were the authors).
Finally, you have to love the disclaimer at the end - Perhaps I'll start adding that same disclosure to everything that Goatmug writes as well..... so here goes.

"Views expressed do not necessarily reflect official positions of the Federal Reserve System".

GOATMUG

KYLE BASS PART II - WHAT THE FUTURE LOOKS LIKE

Kyle Bass Part II



I hope you enjoyed this.  This is a rare example of a really smart guy serving you "no spin" and telling you how bad it is.  If I drank all I'd have do to sober up would be to watch Kyle a few times and I'd be ready!

GOATMUG