The Horns of a Dilemma: What Lies Ahead?

Last week we went through a composite list of all the recent bad news on the economic front and this week, Ben Bernanke went to Congress and laid out the problems that lie ahead. Our country truly finds itself now squarely on the "horns of a dilemma."

It was another volatile week in the markets with interest rates gyrating wildly and 1-2% moves in the index remaining a commonplace event. Our metals positions declined as they corrected after a quick run up, the dollar rebounded sharply from recent lows and the market seemed unsure how to react to Friday's better than expected employment report, shooting higher at the open, only to end up very mixed on the day.

Also the S&P 500 crossed its 200 day moving average which is typically thought of as being the demarcation point of long term uptrends, and so many are calling this the beginning of a new bull market. And, of course that could be correct.

But we're bunching up at the 940 level and on Friday, one would have expected a sharp move up from the lower unemployment reports but that didn't materialize because of concern over impending inflation and rising interest rates.

And so the country is between a rock and a hard place.

The situation is a dangerous one, and here's why:

The View from 35,000 Feet

GM (GMGMQ.PK) went bankrupt on Monday and unemployment went to a 26 year high of 9.4% this week. Retail sales reports were disappointing and Bernanke forecast a tepid recovery later in the year in his testimony before Congress.

More chillingly, he said that current deficits were unsustainable (no kidding) and that the Fed would not monetize the debt and that the recent rise in interest rates was due to the rapidly exploding Federal deficit and the projection that higher interest rates would be required to attract buyers for all this new debt.

He said we must reduce the deficit and so here's the rub, the horns of our dilemma. The only two ways to do that are to raise taxes or cut spending, and either one of those options could easily kill off the fragile "green shoots" recovery that's suppposed to be underway. If we raise taxes or cut spending, the recovery gets stunted, and if we don't, rising interest rates will do the job for us by stifling business growth and home buying. So, it's hard to see a clear way out of here to smoother waters ahead. And that's why the markets ended so mixed on Friday.

9 stocks dropped for every 7 that rose, the 37th bank of the year was seized by the Feds on Friday and 10% of Americans qualify for food stamps. Futures contracts show 70% odds of a Fed interest rate hike by November, up from just 27%, oil continues its rise and acts as a brake on economic growth, and so by any measure, these are not good times.

The Week Ahead

Tuesday: April Wholesale Inventories,

Wednesday: Crude Oil Inventories, Fed Beige Book, May Retail Sales

Thursday: Weekly Jobless Claims, April Business Inventories

Friday: University of Michigan Consumer Confidence Index

Sector Spotlight:

Weekly Leaders: Industrials, Oil, China

Weekly Laggards: Taiwan Index, T Bonds, Japanese Yen

On Friday, I drove my 16 year old to school for the last time, as later that morning, I picked him up and took him to the DMV to get his driver's license. I'm sure you can remember getting your driver's license, as I can, and the sense of freedom and adventure that comes with that major rite of passage. It was a landmark day for our family, and after he passed with 100%, he dropped me off at home and I took a picture as he drove off solo and back to school. He disappeared down the hill and around the corner, and in just an instant, my little boy was gone.

Disclosure: GLD, SLV, AGQ, UGL, TZA, TWM

Comments

[Douglas Kor...:]

It's really simple: no dilemma at all.

RAISE TAXES ON THE RICH, and impose a $5/gallon gasoline tax.

The very rich don't spend their money on production, they ship it to offshore tax hideouts; and a rise in gas taxes would start to penalize Big Oil and also force production of Electric cars.

Big Oil has been getting a free ride for too long; we pay their military bill, subsidize refineries, pay for the health damages caused by burning oil (kids raised in proximity to car exhaust have more permanent lung damage the closer they are), oil wars, urban runoff and other problems cause by burning oil.

About time to stop pandering to big oil, and start clamping down on free rides for the very rich. Let them pay their share, instead of slacking.

Jun 08 02:42 AM

[Dan in mpls:]

No, I say just kill the rich and take ALL their money instead. They eat more then poor people then they insult the poor further by hiring them to build big fancy houses then they force poor people to drive them to stores where other poor people work seling goods made by yet more poor poeple. After they they waste the rest of their money by sticking it in some big hateful bank (whos employees dont make that much money either, but dress really well) and the banks just go and lend it to the leeser poor people who are trying to start a business or buy a car. So, just short circuit the whole mess and take ALL of it from them at once. Problem solved. Though I had been calling for $5 gas for 20 years, if we'd phased that in we'd be in fine shape today.

Jun 08 07:13 AM

[doubleguns:]

Hopefully no one puts you in charge.

Gas tax would send every one marginally employed over the edge. Those on unemployment would never be able to get a job if they couldn't get to the interview since they had NO GAS!!!!

One must be employed to buy electric cars and the electricity comes from OIL in so many locations it would shift a lot of money out of peoples check books just to pay for the NEW COST (taxes) of energy.


On Jun 08 02:42 AM Douglas Korthof wrote:

> It's really simple: no dilemma at all.
>
> RAISE TAXES ON THE RICH, and impose a $5/gallon gasoline tax.
>
> The very rich don't spend their money on production, they ship it
> to offshore tax hideouts; and a rise in gas taxes would start to
> penalize Big Oil and also force production of Electric cars.
>
> Big Oil has been getting a free ride for too long; we pay their military
> bill, subsidize refineries, pay for the health damages caused by
> burning oil (kids raised in proximity to car exhaust have more permanent
> lung damage the closer they are), oil wars, urban runoff and other
> problems cause by burning oil.
>
> About time to stop pandering to big oil, and start clamping down
> on free rides for the very rich. Let them pay their share, instead
> of slacking.

Jun 08 07:18 AM

[The Geoffster:]

"About time to stop pandering to big oil, and start clamping down on free rides for the very rich. Let them pay their share, instead of slacking. "
As long as we're engaged in ideological fantasies, let's withold the vote from anyone under 30 with a net worth less than seven figures.

Jun 08 09:02 AM

[silverwood:]

Congrats on your boy's driving accomplishments. Your little boy will never be gone you just have to be able to see him inside the man your boy is growing into. As for our economic dilema trying to tinker with the controls of a failed system(read monetary) will never be successful. It would be better to remove government from free markets and let free capitalism work by itself.

Jun 08 12:01 PM

[TheHague:]

Thanks for the little bit of humanity at the end of your post! They all drive down the street and out of our lives all too soon. Mine just moved into her first new home. Her room empty. Yet oh so full!

Thanks again!

Jun 08 03:13 PM

[John Nyaradi:]

Thanks so much, silverwood,
john


On Jun 08 12:01 PM silverwood wrote:

> Congrats on your boy's driving accomplishments. Your little boy will
> never be gone you just have to be able to see him inside the man
> your boy is growing into. As for our economic dilema trying to tinker
> with the controls of a failed system(read monetary) will never be
> successful. It would be better to remove government from free markets
> and let free capitalism work by itself.

Jun 13 04:15 PM

[John Nyaradi:]

Thanks for your comments and shared feelings,
John


On Jun 08 03:13 PM TheHague wrote:

> Thanks for the little bit of humanity at the end of your post! They
> all drive down the street and out of our lives all too soon. Mine
> just moved into her first new home. Her room empty. Yet oh so full!
>
>
> Thanks again!

Jun 13 04:16 PM