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  • The Supercommittee is Irrelevant
    By now, everyone has heard of the “supercommittee” that Congress set up last summer to negotiate a serious deficit reduction package that individual Congressmen could not risk being associated with.  We are seeing more and more mention of the supercommittee in various investment newsletters and client notes, as well as on the pages of Seeking Alpha.  There has even been talk of another sovereign credit downgrade if the committee fails to reach consensus.  Moreover, anyone who watches TV or listens to the radio can see that firms with profits at stake have been pouring millions into sappy, don’t-cut-this-or-that-program advertisements.  In short, people with money are taking the committee into consideration.
     
    With its work set to wrap up in two weeks, let us examine the prospects for the committee’s success.
     
    First, unfortunately, there is zero chance that the supercommittee will get to serious deficit reduction.  Although holding down the social security COLA, promising (as always) to reduce Medicare fraud, and counting imaginary savings from not staying in Iraq or Afghanistan forever is not what the supercommittee was set up to do, that seems to be the most likely outcome at this point.  Closing some corporate tax loopholes is another possibility, which would provide a means for raising modest additional revenue without violating any no-new-taxes pledges.  However, European-style austerity—with immediate, tangible reductions to pensions, benefits, central government support for local budgets, spending on consultants, as well as military outlays—is simply not in the cards.  It is unlikely that the supercommittee will recommend so much as one government office, one program, one initiative for termination.  Moreover, even if the proposed $1.3 trillion-over-ten-years in cuts actually took place, we must remember that the deficit is running at around $1.3 trillion annually.  So this was never a serious discussion in the first place.
     
    Second, the “automatic” cuts that are supposed to take place if the supercommittee does not do its job, are really not automatic at all.  There is no way that Congress, today, can legally bind itself to doing or not doing something, tomorrow.  Anyone familiar with Congressional practice and with our Constitution knows that all the “automatic” talk was nonsense from the get-go.  As for “sequestration”, a rare term that has entered the discourse over the last few days, the fiscal procedure that it describes is almost wholly conceptual, having never been implemented on a large scale.  It would be extremely difficult for Congress to order the Administration to withhold tens of billions of dollars that Congress itself has appropriated.  It might even be unconstitutional.  And regardless, any "cut" through sequestration would likely amount to either a temporary or, at most, a one-time withholding of appropriated funds, rather than a permanent spending reduction.
     
    So really, this is all just a big dance.  No doubt the people directly involved are taking it seriously and working long hours to produce some kind of result.  However, in the big picture, it will not make any difference whatsoever.  There will be no “automatic” cuts, no real spending reductions, and our national debt will keep growing at its present rate, if not faster due to compounding interest.  European-style austerity will not come to the USA in the near-to-medium term.
     
    Does that matter?  Presently, it does not.  The ongoing circus in Europe continues to raise the “risk-free” appeal of U.S. sovereign debt.  This means that despite the recent S&P downgrade, there is now very little pressure on America to get its purse in order.  In fact, the potential imminent disintegration of the Eurozone is a gift for Washington and for all Americans who rely on government for some or all of their subsistence.  Even if S&P were to get frisky again in the near future, the bond market would not take it seriously, just as it scoffed at the last go-round.  So Washington really is off the hook for now, and anyone who predicts some kind of near-term bond market consequences is deeply mistaken.  Moreover, healthcare, energy, and other industries concerned about reduced profitability from reduced government cheese can rest easy—we are back to business-as-usual.  In short, we can expect no immediate market or economic repercussions of any sort from any action proposed or not proposed by the supercommmittee.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: macro, bonds
    Nov 09 2:05 AM | Link | Comment!
  • Divining the Fed's Motives
    The Fed’s just-announced intention to do little more than buy $400 billion in long-term T-bonds while selling an equal volume of short-term notes by June 2012 is a disappointment to anyone hoping for higher stock prices.  Indeed, the numbers involved are substantially smaller than QE2.  Even more importantly, QE2 did not involve selling the shorter end of the yield curve.  Essentially, in dollar terms, the Fed is taking out exactly what it is putting in via primary dealers.  This is no way to juice the markets.
     
    Has Chairman Bernanke ditched his long-held belief that simply reflating the stock market will generate enough confidence to put the real economy on track?  Is suppressing long-term interest rates intended as a boost for the housing market?  Does it constitute QE 3.0 or just QE 2.5?  And finally, if this latest Fed announcement was already “priced in” to stocks, as so many analysts have claimed, then why did the S&P drop almost three percent in just ninety minutes this afternoon?
     
    Perhaps the only near-certainty is that Bernanke and Co. have taken a hint from Congressional Republicans, who recently warned the Fed in no vague terms against direct stimulus-via monetary-policy, also known as money printing.  As I wrote on this website in December 2010, the Republicans are growing more restless to take on the Fed—partly out of sheer populist considerations, and partly to stick it to Obama and the Democrats’ 2012 election prospects, which now rest almost exclusively on monetary expansion.  Indeed, if today was Bernanke’s “big day” and all he could offer was a modest shell game with short- and long-term Treasuries, we might conclude that something is holding the Fed back.  And that something is likely the prospect of revenge from Republicans, following their expected 2012 Congressional landslide.
     
    Because things could get very ugly for the Fed come January 2013, if not sooner.  Americans are looking for a scapegoat, and the Fed has never been the subject of more derision than it is now.  Millions of Glen Beck fans have discovered that America has a central bank, and they are not happy about it.  That Bernanke will have spent most of his tenure under the Obama Administration does not help either.  No less than GOP presidential front-runner Rick Perry has talked about treating Bernanke "ugly" if the good Chairman showed up in Texas.  Sounds like lynch-mob talk to me.
     
    My guess is that going forward, the FOMC will continue to disappoint those hoping for massive ongoing money printing.  However, it cannot pull the plug on bond purchases completely.  The U.S. budget deficit is too large, and there is not enough money from private investors to plug it.  In short, we will see at least some monetization for a long time to come.  I hesitate to say “indefinitely”, as of course this cannot go on forever.
     
     
    Sep 21 10:30 PM | Link | Comment!
  • New York Times Challenges BP on Size of Gulf Leak
    As a follow-up to my recent posts on this matter, readers should know that the nation's foremost newspaper has printed a harsh piece calling out BP as well as the Feds on their increasingly-ridiculous 5000 barrels-per-day estimate for the Deepwater Horizon leak.  [[hyperlink http://www.nytimes.com/2010/05/14/us/14oil.html?hp]]

    Separately, a National Public Radio broadcast quoted a number of scientists—one of them having subjected yesterday's leak video to sophisticated computer analysis—to the effect that the BP well could be spewing anywhere from 20,000 to 100,000 barrels of crude oil per day.

    These news pieces support what I have been saying here on SA, namely, that the spill is many times worse than has been claimed in Houston and Washington.  Anyone wishing to ignore this reality will be shocked when the truth, as always, is officially revealed, perhaps by way of some whistleblower who leaks internal emails or even voice recordings showing that BP knew and hid the full scale of the leak.

    This is what happens, folks, in a free society
    you cannot stop the truth from getting out.

    Meanwhile, BP's attempts to plug the geyser have failed and we are back to square one, in other words, waiting several months for the drilling and casting of a new well that will, hopefully, relieve pressure in the deposit, or possibly meet the existing well half-way down and allow it to be plugged with injected matter.

    If we do, in fact, have to wait that long, the entire northern section of the Gulf of Mexico could become a dead zone for an indeterminate period of time.  Anyone who thinks that BP's share price will hold up near $50 under these circumstances is dangerously mistaken.

    It has not helped that BP's behavior during this entire crisis has been nothing less than piggish.  For example, demanding that fishermen recruited to the clean-up effort sign papers limiting the company's liability is outrageous.  When the President of the United States has to go on television to tell people not to sign these papers, you know that BP is treading on extremely thin ice.

    Despite last week's epic stock plunge, there is still a lot of complacency among investors.  "Extend and pretend" is still the game, and it is easy to extend that thinking to BP and assume that everything will be OK, that reality will not intrude anytime soon.

    Well, BP shareholders, consider yourselves warned.


    Disclosure: No positions in BP, RIG, or HAL, whether long or short
    May 14 10:19 AM | Link | Comment!
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