Commentary for the Week of March 8

In the wickedly funny Tim Burton film Mars Attacks! there’s a scene where all 534 members of Congress get vaporized by aliens with ray guns. Alas, just when we need them most, there is nary a Martian invader around.  Instead, we have only the tragicomic spectacle of political thumb-wrestling on such a grotesque scale that even optimists will have been sapped of hope that the Republic can somehow survive the follies and depredations of its ruling class. The fact that the negotiations have continued into 2013 after a supposed compromise was reached on New Year’s Eve hints of further perils for Americans in the new year.  For, nowhere in any compromise soon to be struck is there a serious word about spending cuts. The main focus of the talks is the extent of tax increases that will in any case hit most workers, and hard. “In effect,” noted the Wall Street Journal, “Congress has delayed the fiscal cliff by erecting a new and potentially more dangerous one.” Just so. Unfortunately, Monday’s eleventh-hour compromise between Obama and the Senate came after the House had adjourned for the day. Initially the news media waxed exuberant, as is their wont when little or nothing of substance has occurred on Capitol Hill. A day later, however, the headlines that trumpeted the story have become “Dewey-Beats-Truman” offal. We now learn that the Senate’s recipe for Sweeney Todd sausage is not going down so well with House members and that they could reject it. And for good reason: No one especially likes the latest deal – not the Democrats, not the Republicans, not even Obama himself. At least this time Nancy Pelosi has kept her mouth shut, since it’s obvious that, like Obamacare, whatever budget agreement eventually emerges will have to be lived with for a

Index futures remained hard-wired to vibrations from Capitol Hill Sunday night, nervously discounting each mood shift perhaps 30 to 40 minutes ahead of whatever web-based reports were to follow.  Shortly after 7 p.m. EST, the E-Mini S&Ps were up the equivalent of about 50 Dow points, suggesting DaBoyz were willing to go way out on a limb based on the flimsiest reasons for optimism.  For index-futures traders who make their living at night in the thinnest of markets, this amounted to a game of chicken, since any hint of a new impasse threatened to reverse the current rally, turning it instantaneously into a 100-point decline. At last glance, news reports had Republicans giving ground on a measure that would have changed the way inflation is calculated to determine Social Security and other benefit payments. It's hard to believe a formula exists that would lower the marquee inflation rate beneath where it already is. Be that as it may, as we went to press there were evidently gaping differences on some other key issues, including the Alternative Minimum Tax (AMT). [Late-breaking news: Talks adjourned Sunday night with no agreement in place.] Think You’re Safe? Whatever fiscal package emerges, it would appear that Joe Taxpayer confidently believes it's going to be someone else’s ox that gets gored. A headline in the local paper revealed the public's not-exactly-shocking ignorance about what’s going on in Washington: Shoppers Not Fearing Plunge Off 'Cliff' was how the Boulder Daily Camera presented the story-of-the-hour.  Oh really?  It's a tragedy for America that people like those quoted in the article are allowed to vote, since they in fact have much to fear, even if they are not among Obama's “filthy-rich” earners of $200,000 or more.  For starters, a steep upward skew in the Alternative Minimum Tax that is

[Inflationary pressures are not exactly rampant right now, notwithstanding the huge increase in the cost of living imposed on us by Obamacare. For your interest, we present below some observations with a deflationist theme that were left in the Rick’s Picks forum yesterday by Cam Fitzgerald, an occasional guest commentator here. In our opinion, he gets the big picture  just about right. RA] There’s no doubt that deflationary pressures are still the overriding concern of most Western nations. That deflation itself is at our gate is hardly even debated anymore, as it is now widely acknowledged that the coming wave of baby boomer retirements will lower consumption , hold home values flat in real terms and push up Medicare costs for at least the next decade. Ongoing deleveraging and the prospect of rising savings rates and falling consumption could prove to be very damaging to economic performance while lowering growth and pushing us into recession. Jobs growth is still tepid, and it is difficult to imagine this improving substantially as public debt is finally dealt with at the policy level while taxes rise and program spending is cut. Others have asserted here that we will deflate first and have nasty inflation later. I agree. The worry is just how bad the inflation might be at the later stages, but my guess is that it will take years to play out.  We who watch the trends will have time to adjust if we pay attention to the signs and use our heads to avoid the shoals that lie ahead. We have been fortunate, though. The worst of our worries have not yet materialized. That is not to suggest that they are not lying latent, awaiting the right circumstances to spring on us in surprise. Instability abounds, and any broad shake-up on

[Turns out it was our own Doug Behnfield  -- good friend, astute financial advisor and occasional contributor to Rick’s Picks  -- who in June 2010 coined the term “fiscal cliff.”  Readers may remember his essay, which took its inspiration, metaphorically speaking, from the suicidal ending of the film Thelma and Louise.  In the guest commentary below, with the U.S. a literal inch from the cliff, Doug describes a likely outcome. One thing’s for sure, he notes: No amount of political squabbling will spare us the very real economic pain it will take to bring the national budget into balance. RA] Recently, I was back in Connecticut visiting my mother. She doesn't have a computer and hence, no internet. As a result, I relied on my Smartphone and an "app" to check in on financial news most of the time. On one particular day, I noticed that every single news item contained "Fiscal Cliff" in the title or the text. It reminded me that it is rarely the problem staring us in the face that affects the markets. It is the one lurking in the shadows, grasping a two-by-four. Lately, mainstream economic forecasts for economic growth for the current quarter have dropped below 1%. The recession may have begun. An agreement not to do anything right now on tax increases and spending cuts has probably been priced into the market. A recession has not. I also recalled that I had used the Thelma and Louise analogy some time ago in one of my quarterly commentaries. [Note: It ran here in June 2010 under the title Thoughts on the Great Society.]  Apparently, I was the first one to coin the term, more than a year before Alec Phillips came up with it and almost two years before Ben Bernanke popularized it. "The

“The  only response to a child’s grave is to lie down before it and play dead.” – Bill Knott, poet. [This commentary has elicited more responses than anything previously published on the site. I'll leave it up over the weekend to accommodate final thoughts and summations. RA] The shooting rampage in Connecticut makes any other topic seem trivial at the moment. When America gets back to business on Monday it will be with a heavy heart and the bewildering feeling that we are powerless to do anything about such violence, now or in the future. Those who advocate gun control undoubtedly believe their cause is just.  But they might as well be talking about banning automobiles to save what remains of the world’s coral reefs and glaciers. For even if it could be done, and even if carbon emissions were the undisputed cause of the problem, it is already too late.  Better to adapt than to tilt at windmills.  To suggest that gun control is the cure for rampages like the one that occurred on Friday is to avoid confronting the real problem: civilization itself is mentally ill. And for that, there are no easy cures -- certainly not outlawing certain types of weapons. Could it get any worse than the mass murder of twenty first-graders?  Unfortunately, and tragically for humanity, it conceivably could. We shudder to imagine what horrific event will eventually overshadow the unspeakable carnage that took place at Sandy Hook Elementary School. Twenty children, none older than seven, were murdered where they sat, each shot repeatedly by a high-powered rifle. Six adults were slain by that weapon as well, some of them in the heroic act of shielding the children. Arm All Adults Better that all of the adults should have been packing heat. Many of you,

The institutional crazies, village idiots and knee-jerk opportunists who bought shares yesterday following a Fed announcement of yet more monetization seem not to have been paying attention, at least initially, to the nasty sell-off in T-Bonds.  Well before yesterday, any sentient being would have surmised that easing’s impact on the economy had reached the point of diminishing returns. With administered rates pegged at zero and mortgage loans near historical lows, how much more boost are we to expect from yet another gaseous effusion of bank-system credit?  Most of it is going unused anyway, other than by banks for the purpose of “buying” – you got it! –  Treasury paper. Contemplating this stupid shell game probably gets a faux Keynesian like Krugman hard, but sage T-Bond traders evidently were having none of it. As a backdrop, the Fed has been buying $45 billion of T-bonds each month, but offsetting it by selling a like amount of short-term Treasurys.  With yesterday’s announcement, the central bank ditched the offset, clearing the way for an increase in the Fed’s portfolio of “assets” above the current level of $2.861 trillion.  This latest twist in the soon-to-expire, dumber-than-dumb Operation Twist got a big thumbs-down from the bond traders, who drove futures prices sharply lower. Stocks, for their part, relapsed after the obligatory, news-driven short-squeeze, demonstrating that although the Fed may be capable of managing inflation expectations, its ability do so is no longer to be reckoned in months or weeks, but in minutes. Bullish on T-Bonds Despite the long bond’s plunge, we remain bullish on it down to 2% -- but not because of the Fed’s insatiable appetite for auction paper. As we saw yesterday, the promise of more easing has become a short-term negative for bonds. However, we expect the effect to be overshadowed, at

Stocks have ralled this week on the prospect of a budget deal, but don’t expect them to get very far. With a modest surge in the broad averages, investors appear to have upped their bet that Obama and his heartfelt enemies in Congress will agree to do what we have confidently expected them to do all along – i.e., kick the can down the road. No one will be surprised, since kicking the can down the road is what politicians do when they are not in recess, campaigning or buggering their clerks. Unfortunately for us all, the much-kicked can will still be lying there when 2013 begins, fueling worries about what this implies for the U.S. economy in 2013. The good news, such as it is, is that Obama’s “filthy rich” – mainly small-time entrepreneurs who toil 70 hours a week to net a princely $130,000 after taxes  – will get a temporary reprieve from 39% marginal rates.  The dollar will be spared too, at least for a while, since Obama will not be given the ruinous power to raise the debt ceiling without consulting Congress. And the military pork-barrel that feeds so many cities and towns will remain alive and well, albeit temporarily, since a $500 billion sequestration of defense funds will not automatically take effect. What will remain once the can has been kicked yet again is an economy that is probably already in recession, a housing market nearing the end of its dead-cat bounce, and a consumer hangover from the recent binge in, among other things, automobile purchases.  (This just in: A hitherto unnoticed provision in Obamacare will charge each and every insured person an extra $63 each to cushion the cost of covering people with pre-existing conditions.  This works out to tens of millions of dollars

[The guest commentary below introduces James Tolard, an old and dear friend as well as an exceptionally talented commodity trader. Jim’s style is to surf the big trends, taking perhaps just two or three new positions over the course of a year. Appearing relaxed and effortless is his great gift, and this quality is there in spades whether he’s managing a large soybean position, driving a golf ball 300 yards or cooking coq au vin for a dozen dinner guests. Jim lives in a secluded village, but I’ve coaxed him out of semi-retirement to write occasionally on any subject he chooses.  In the essay below, well off the beaten path for Rick’s Picks readers, he ponders certain epistemological questions that will necessarily remain unanswered.  RA] The idea of a 6,000-year-old earth is summoned time and again as if to prove that responsible adults do not hold elective office except as reactionaries.  We hear shrill voices trying to shout down superstition. And yes, I am all for this as long as the shouting is not by way of kangaroo courts, gulags, and surveillance.  But what is at issue? The Old Testament, or Torah, contains enough age references to the patriarchs to imply that the first man came into mortality, driven from the Garden of Eden, about six-thousand years ago. The Jewish calendar proceeds from this event and is currently at 5773. But the modern calendar, a Roman invention, didn’t come into being until what is now 42 A.D. So, back to the question of the age of things. The principal arguments all miss thepoint, which is that the enemies of revealed knowledge refuse to tolerate a conflict with cosmology and geology.  Persons of faith, for their part, refuse to budge from their belief that the Scriptures contain revealed knowledge. It is

If you’re a market-watcher who has grown as bored as we have with this month's tedious ups-and-downs, here’s a black magic forecast for the Dow Industrials that you can track in real time to help make the time pass. Besides the entertainment value of watching this prediction play out, you’ll also be able to trade it if you desire. The predicted rally is nothing spectacular -- just a modest, 185.58-point upthrust in the Indoos.  How could we be so brashly certain that the impending surge will be exactly 185.58 points?  Hidden Pivot Analysis, is how. That’s our propietary technical method, and if you use it to analyze the chart below, the price pattern on display looks too pretty to fail, even by an inch. We employ a simple ABCD wave form to predict these moves, and although this pattern in particular looks somewhat gnarly, it becomes a perfect “ten” when subjected to just a few simple rules. Okay, it's at least conceivable the rally will miss our 13259.62 target by a hair. Even so, we can all but guarantee that the target will be reached, and without an intervening correction. Both of these outcomes are confidently predictable because of the way in which yesterday’s surge moved so easily through 13,012, a  “Hidden Pivot midpoint.”  Notice how the steep, uptrending bar circled in red smashed through this price point without pause.  According to our proprietary technical method, this kind of price action at a Hidden Pivot all but guarantees that the target with which it is associated will be reached. As for the precision of the “hit” that we are predicting with such confidence, it comes from certain features of the ABCD pattern itself that trained “Pivoteers” are taught to recognize. You Can Learn You could learn to do these tricks