Friday, March 1, 2013 - It Can't Happen Here

Wealth Protection Conference April 5, 6 2013. Click here for info. 

It Can't Happen Here

by Sinclair Noe

DOW + 35 = 14,089
SPX + 3 = 1518
NAS + 9 = 3169
10 YR YLD - .03 = 1.85%
OIL – 1.14 = 90.91
GOLD – 2.70 = 1577.80
SILV + .07 = 28.68

Yes, this is the end of the world as we know it. Elected government officials have ceded their power; they are being replaced by a puppet regime; technocrats that do not answer to voters. I am not making this up. The technocrats will have the authority to cut spending, or change contracts with labor unions, or merge or even eliminate whole departments within the government; they may sell off or privatize the assets of the government; and if that is not enough, they might declare bankruptcy.

No, this is not democracy. Yes, this is happening right now; I am not making this up; it is happening in Detroit. I know what you're saying: “Oh, it's Detroit. That place is a mess.” Well, yes, but the people of Detroit are not so different from you and me. They just have massive municipal debt; they spend more than they take in; their economy has stagnated; their homes have been foreclosed; their jobs have been lost; or if they still have jobs, they can't earn enough to stay out of debt. They are not so different.

We are on the slippery slope. First they came for the Detroiters, or the Detroitians, or the Detroit-wah, or whatever you call them, and I was not a Detroiter, or whatever. Then they came for the Minnesotans but I've never been a Vikings fan.

Next thing you know, there's a fiscal manager appointed by the governor, setting up a dictatorship in one of those rusty old, art-deco buildings. But the Detroiters are a clever lot, and even before the first volleys were fired they have taken a tactical advantage. Like a matador waving a red cape, the cagey Detroiters have executed a brilliant faena, a natural. And before the fight has begun, the fiscal manager is trapped. “Come in,” Say the Detroiters to the fiscal manager, “but if you come in you own it. You own Detroit. You own education. You own police and fire. You own public lighting.”

Michigan Governor Rick Snyder hasn't yet named the emergency fiscal manager, but Dave Bing, the Mayor of Detroit will have 10 days to get the decision revoked. After that the manager takes over and will try to deal with $14 billion in long-term liabilities and annual deficits topping $100 million. The emergency manager law was repealed by Michigan voters, but the legislature passed a revised version during the lame duck session based on the idea that the only thing worse than Detroit's financial problems is the mob rule of democracy.

I know what you're saying: “It can't happen here.”

If you've managed to see daylight recently, you know today is Sequester Day. Reporters gathered in Washington DC on a grassy knoll to watch as a Republican Congressman and a Democratic Senator emerged from their respective holes, dynamite vests strapped to their chest, and kaboom.

President Obama held a press conference and he said the sequester is “dumb” and “arbitrary”. John Boehner, the Speaker of the House, said “discussion about revenue is over.” Erskine Bowles and Alan Simpson, the strange uncles of Sequestration called it “stupid, stupid, stupid”. Abby Joseph Cohen, the chief market strategist at Goldman Sachs, said the rally in the stock market is real and supported by fundamentals. If you recognize the non sequitur, give yourself a cookie.

Cohen advised that investors may do well to put that money to work in stocks - or to shift out of longer-term bonds into stocks, which she describes as the "better investment." Cohen did note, however, that if interest rates rose in a "dramatic and sudden" fashion, stocks could get hurt; but no worries, because rates won't go up, unless there was something like a big shift of money out of longer-term bonds.

Actually, the bigger concern about rates is from the Federal Reserve exiting QE to infinity. Mark Leibovit will be my guest Sunday morning and I spoke to Mark earlier today; he reminded me that Marty Zweig passed away. Zweig is credited with the great wisdom of saying “Don't fight the Fed.” Zweig wrote about it in his book “Winning on Wall Street”: “the monetary climate—primarily the trend in interest rates and Federal Reserve policy—is the dominant factor in determining the stock market’s major direction.”

“Generally a rising trend in rates is bearish for stocks; a falling trend is bullish...  falling interest rates reduce the competition on stocks from other investments, especially short-term instruments such as Treasury bills, certificates of deposit, or money market funds... when interest rates fall, it costs corporations less to borrow. As expenses fall, profits rise…So, as interest rates drop, investors tend to bid prices higher, partly on the expectation of better earnings.”

 When rates are low, as they are now, the second of two rate hikes or a one-percentage-point increase in the prime rate would trigger a Zweig sell signal. This week, Bernanke explained that we won't have to worry about that for a couple of years, probably. Wall Street ate it up. Bernanke said a bunch of stuff and most people didn't hear any of it.

For example, the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before; and what he said, translated from Fedspeak into plain English, was that the obsession with deficits is a terrible mistake.

First of all, he pointed out that the budget picture just isn’t very scary, even over the medium run: “The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of G.D.P. through much of the current decade.”

He then argued that given the state of the economy, we’re currently spending too little, not too much: “A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.”

Finally, he suggested that austerity in a depressed economy may well be self-defeating even in purely fiscal terms: “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

So the deficit is not a clear and present danger, spending cuts in a depressed economy are a terrible idea and premature austerity doesn’t make sense even in budgetary terms.

So, today is Sequester Day, officially it will start at midnight, but it's not like you'll feel an immediate wave of austerity; that's because most Americans have already been hit by a wave of austerity. The Bureau of Economic Analysis reports personal income dropped 3.6% in January, the biggest drop in 20 years. It's not as bad as it sounds, sort of. The decline was driven by a one-time event related to the last artificially manufactured economic crisis. You remember that many companies rushed to pay shareholders' dividends before the fiscal cliff hiked dividend tax rates, and so in January we saw a reversion to the dividend mean.

You also remember that the fiscal cliff resulted in the end of the payroll tax holiday, and so most workers saw an extra 2% bite to paychecks; that cut nearly $127 billion from income in January. That's not a one-time thing. And soon we'll have other waves of austerity washing over the land. But Americans are resilient. When the going gets tough the tough get going.

And even if incomes drop like an Egyptian hot air balloon, we're never really out of money while we still have plastic in our wallets.  The New York Fed yesterday reported that Americans added 0.3 percent to their debt load in the fourth quarter of 2012, the first quarter of rising debt in four years. That suggests consumers are feeling frisky enough again to take some chances, make some mistakes. And in another good sign, those mistakes are fewer and farther between, with lower delinquencies; except for student loans.

In his remarks this morning, Obama was careful to not predict any sort of financial crisis as a result of the sequester hitting, instead emphasizing the impact on working Americans and a potential drag on economic growth. He said: "It is absolutely true that this is not going to precipitate the kind of crisis we talked about with America defaulting and some of the problems around the debt ceiling. I don't anticipate a huge financial crisis, but people are going to be hurt."

So, the sequester is not the end of the world as we know it. That comes on March 27, when the continuing resolution runs out, and based on past performance, the politicians shut down the government because one thing they are good at is strangling economic recovery through economic incompetence.