Friday, May 17, 2013 - Squirrel

Squirrel

by Sinclair Noe

DOW + 121 = 15354
SPX + 17 = 1667
NAS + 33 = 3498
10 YR YLD +.08 = 1.95%
OIL + .83 = 95.99
GOLD – 25.70 = 1361.20
SILV - .43 = 22.36

Record highs for the Dow and the S&P 500; marking the fourth consecutive week of gains. For the week, the Dow gained 1.6%, the S&P 500 gained 2%, and the Nasdaq was up 1.8%. The S&P 500 is up about 13% year to date.

Someone asked me yesterday if I intended to talk about the scandals in Washington; you know, the Benghazi scandal, the IRS scandal, and the Associated Press scandal. I suppose we can talk about that if you want.The issue I might address right now is, what does all the scandal-mongering mean for the economy?

Well, we could look to the Clinton years, which continued to perform handsomely, but I think that had more to do with the dot.com boom than with Clinton's proclivity. Greenspan warned about irrational exuberance while fostering policy that just pumped the markets to higher highs. Not so different really from Bernanke's warnings about excessive risks while continuing with QE to infinity and beyond.

The market has been profiting from the indulgences of the Fed's easy money, and the Chairman seems more worried that Congress will busy itself with more fiscal austerity in the form of quick-timed spending sequesters and additional tax increases than he is about inflation from easy money. Unspoken is the fear certainly in the Fed quarters and lurking in the markets' subconscious that Congress will go even further and again set up another credit-rating political cliffhanger over the debt ceiling extension.

Maybe, the politicians can pull themselves away from their compulsive partisanship to recognize that the deficit is getting better. The Congressional Budget Office revise its budget projections. The short-term deficit, in particular, is way lower; $200 billion lower; or a $643 billion deficit for 2013 rather than an $845 billion deficit. That should be really big news, just not this week. Both sides of the aisle could take credit for that, but it barely gets a nod. Congress is distracted, like a dog in the presence of a squirrel.

And the longer they keep up their nonsense, the less time they have to meddle with the economy; which might not be such a bad thing. No time to come up with a Grand Bargain on Social Security and Medicare; no time to figure out entitlement cuts; nothing but gridlock through the hazy days of summer.

For a business community that constantly begs for certainty, maybe they would enjoy a lazy summer of slow, steady growth without the distractions from Washington. Fed Chairman Bernanke has begged for Congress to come up with fiscal policy that might help grow the economy, but would probably be happy to see Congress stop stepping on the economy's tail with it's austerity obsession. The politicians are clueless about the economy and they could only screw things up.

Case in point; last week the US House passed the Full Faith and Credit Act, which quickly gained the nickname “Pay China First Act”. The supposed purpose of the act is to prevent default on the public debt as a result of the debt ceiling.

The idea was the act prioritizes the financial obligations of the US government, and authorizes the Secretary of the Treasury to meet only the highest priority obligations when at the debt ceiling; that is how the act is described by its own authors, since the head of the resolution contains the description, “A bill to require that the Government prioritize all obligations on the debt held by the public in the event that the debt limit is reached.”

The act seems to have been designed to provide the Secretary of the Treasury with an alternative mechanism for paying off public debt and meeting Social Security obligations once the government has reached the statutory debt limit. But the new mechanism cannot be applied directly to other government spending commitments, and so Congress would still apparently have the ability use the debt ceiling as a tool for shutting down other government payments and forcing the executive branch to accept further spending cuts.

But remember the politicians are not real strong on economics and it appears this act would provide the Secretary of the Treasury with the power to meet all US spending obligations, and effectively eliminate the debt ceiling as a serious political and operational consideration going forward.

The act specifically authorizes the Treasury to issue “obligations … to pay with legal tender”, the principal and interest on the obligations described in subsection 2(b). Now, an obligation is just another debt instrument. So the act basically permits the Treasurer to issue IOUs to pay the principal and interest on public debt. It permits the Treasurer to redeem conventional government debt obligations – all of the usual bills, notes and bonds the government issues, and that count against the debt subject to the debt limit – with a new kind of debt obligation.

Basically, the Treasury could write IOU's and put them in the Treasury coffers to reduce the debt, and then issue fresh bonds to raise cash to pay for whatever they want to pay for.

Squirrel.

The one thing that has roiled the markets lately is talk of the Federal Reserve tapering off Quantitative Easing. While the economy has shown signs of improvement, it is still a long way from a strong economy. Inflation remains under control, so that's not a problem. Unemployment is still a problem, so that's reason to increase stimulus, not taper off. Several regional Fed presidents have weighed in recently, and yesterday, Fed governor Sarah Bloom Raskin raised the possibility that rising inequality may restrain growth for years to come.

In a speech delivered in Washington, Raskin said: “In my view, the large and increasing amount of inequality in income and wealth, which has been an ongoing development for decades, may have exacerbated the crisis. More research is required to determine whether it may also pose a significant headwind to the recovery from the crisis for years to come.”

Raskin’s comments are among the most forceful to date from any current member of the Fed’s seven-person Board of Governors regarding wealth, income inequality, and how dynamics in household wealth may be impeding growth and prolonging the realization of a full-fledged recovery

Between 1979 and 2007, inflation-adjusted, pretax income for households in the top 1 percent more than doubled, while middle-income households experienced earnings growth of less than 20 percent, according to Congressional Budget Office data. A recent survey by the Fed found that households in the top fifth of annual income owned 72 percent of the total wealth in the economy in 2010, while those in the bottom fifth owned just 3 percent.

Maybe this is the excessive risk Bernanke has been harping on lately.

Here's your weekend reading list:

From the Guardian: A Look at How Apple will petition Washington for a Tax Holiday and what history tells us about tax holidays.

Matt Taibbi continues to dig up wrongdoing by banksters; Everything is Rigged