Commentary for the Week of March 8

[Why do some who frequent this forum see only blue skies ahead for the economy while others expect something like economic Armageddon?  Forum regular Andy Gutterman, aka 'Avocado,' has a theory that one’s point of view may be colored more by income level than by any other factor. In the guest commentary below, he looks at his own circle of friends to expand on the point. Meanwhile, whatever we as individuals might expect, Government itself sees the clouds parting in 2014, ushering in strengthening growth into 2018. Could the Congressional Budget Office be right?  The answer, according to Andy, would probably depend on how optimistic you are about your own economic future. RA] Fred and I are former Republicans now voting Democrat (I voted straight Republican ticket everywhere from 1972 to 2000, then Democrat in 2004 and 2008, Libertarian in 2012, and Democrat in VA in 2013. Even Obama got to me after his election in 2008. Obama cannot lead.) Bob is a Republican turned Democrat. I know Thomas is a Democrat. Charles is Democrat turned Republican -- Tea Party, no less, hence the lively conversations. Yet Fred and I and probably Bob are closet Republicans, and if the Republicans could field a viable candidate we would might vote for them in 2016. (Ted Cruz is not a viable candidate).  Here goes: Muddle Along Indefinitely? Fred argues -- persuasively, I'll have to admit -- that there's no good reason why we cannot continue to muddle along indefinitely. Why does there have to be a crash, he asks? Part of his argument rests on the fact that although I've been expecting a crash for 30 years, it has yet to occur. And if 2008 produced as much of a crash as we're going to see, it must be acknowledged that the

[This discussion topic has just started to get rolling, so I'm going to let it run for another week.  If you're looking for timely trading suggestions and fresh analysis in the holiday-shortened week ahead, tune to the Touts section and the Rick's Picks chat room.  A free two-week pass can be yours by clicking here.  RA] Most of us understand that the audacious fraud that has sustained the U.S. economy and the global financial system can only end badly. But how?  As far as I'm concerned, there are only two possibilities: deflation; or less likely, hyperinflation.  In any event, it’s time for another go-round in the continuing debate.  This issue seems to pop up in nearly every forum discussion no matter what the topic, so let’s use the holiday lull to focus on something that is almost certain to be more interesting than the markets. To get things rolling, here are some bullet points of my own: Because of its quadrillion dollar size, the financial bubble cannot be inflated or deflated away via a gradual process; only a catastrophic implosion or explosion is possible. The most deflationary event we can conceive of – i.e., the banks failing to open one weekday morning – is also the most likely. The monetarists’ definition of inflation/deflation as an increase/decrease in the money supply is worthless in an economy that runs on credit. To understand deflation better than most economists seem to, you need only consider its most pernicious and destructive symptom:  an increase in the real burden of debt. This is the force that is suffocating Europe but which is being held at bay – barely – in the USA by the artificial and unsustainable suppression  of mortgage rates. Federal taxes are steeply on the rise, putting yet more deflationary pressure on households.

I’ve had my doubts that Quantitative Easing would ever be throttled back, even asserting here several times that this was about as likely as a Martian invasion. However, it would now appear that at least some nominal change in Fed policy is nigh.  For one, the news media have unleashed a torrent of ostensibly bullish recovery data that, even if it is believed by no one save editorialists, economists and Obama spinmeisters, is sufficient to provide PR cover for just a smidgen of tightening. And for two, Fed policymakers themselves have been promiscuously encouraging talk of tightening for about the last two years -- talking their book, as it were. Assuming the momentous, long-awaited announcement comes this week, we shouldn’t be surprised, if the central bank’s oh-so-clever expectations managers propose some alternative to QE that smacks of…more easing.  Suppose, for instance, that the Fed announces a reduction in the amount of ginned-up money it uses each month to mop up unwanted Treasury and mortgage debt, from $85 billion to $60 billion. If this portentous shift were to be accompanied by, say, a reduction in the amount of interest the Fed pays on banks’ excess reserves, think of how eager the banks would be to recoup all that lost, risk-free income. Why, they might even have to crank up their own printing presses with promotional lending offers that would make today’s “zero percent-loans-for-18-months!” specials look like usury. Whatever the Fed does, its actions will be geared, as always, toward pumping up home prices and the stock market. What do you foresee, readers?

Stocks rallied sharply on last week’s unemployment news, but shouldn’t they instead have fallen?  In the past, it has not been changes in the unemployment rate per se that caused stocks to rise or fall, but rather the perceived impact of those changes on Fed policy. In the bizarre, inverted world of Wall Street tiny-think, “bad” unemployment news was always greeted with high-five exuberance, since it argued implicitly against Fed tightening.  To be sure, last week’s news was good as far as Wall Street was concerned: The 7% jobless rate announced on Friday was the lowest since 2008. But could those who helped goose the Dow Industrials 200 points have forgotten what Helicopter Ben said last summer – i.e., that the Fed would end its quantitative easing program if U.S. unemployment got “in the vicinity of 7%.”  Of course, there are the usual mitigating factors to be considered that could alter the actual turn of events. For one, because Bernanke’s job is to say what he means without necessarily meaning it, we shouldn’t hold him too closely to his word. And for two, the phrase “in the vicinity of 7%” leaves some wiggle room, Under the circumstances, it’s conceivable that unemployment could fall all the way to, say, 6.7%, before the Fed feels obliged to invoke the dreaded Tapeworm. (“Not on my watch!” Janet Yellen might say, were she not merely one more Fed lackey who moves only when her strings are pulled.) DaFacto Tapering We’ve asserted here numerous times that the odds of a Fed Tapeworm are about the same as a Martian invasion. But we’re going to qualify that, as follows: However the Fed reacts to this (literally) too-good-to-be-true gusher of unemployment news, it will happen in such a way as to leave everyone wondering whether the Fed

Regarding the ongoing Fukushima disaster, whom do we believe?  One of the scariest news stories we’ve ever read implies that we’re all doomed – not just Japan, but the whole world. It boils down to this: try to move hundreds or perhaps even thousands of nuclear fuel rods, some of which may already be damaged or leaking, to a supposedly safe place, and sooner or later a couple of them will bump up against each other, triggering a chain reaction with enough heat to send a radioactive plume into the upper atmosphere and the ends of the earth.  From some of the same sources, we are given to understand that thyroid cancers are already epidemic in Japan, that radiation levels are starting to rise on the U.S. West Coast, that hundreds of tons of highly radioactive coolant are finding their way into the ocean and groundwater each day, and that every fish in the northern Pacific has already been contaminated to some degree. But if any of this true, why hasn’t it appeared in The New York Times? Well, it’s not quite correct to say the Times hasn’t reported the story. It’s there, all right -- for anyone with the patience and diligence to find it.  On November 18, for instance, buried on an inside page, is a “quick update” on efforts to clean up the tsunami-damaged reactor complex. Doomsday fears are way overblown, implies David Lochbaum, a nuclear engineer quoted as an expert by the article’s author, Andrew Revkin. “The truth is that the irradiated fuel in the Unit 4 spent fuel pool does pose some hazard,” notes Lochbaum, “and the prudent management of that risk is to remove it from its present location to a safer, more secure location. In other words, do exactly what it [sic] being

Where do you think the broad averages will be trading at the end of 2014? Will stocks be in the throes of a devastating bear market?  Or will the Dow be galloping blithely higher, on its way to 20000 and beyond?  Clearly, Wall Street doesn’t seem to care whether the economy remains in a wallow. Shares have moved relentlessly higher despite the fact that GDP growth is stuck in a rut, wages are stagnant, and deflation has come to rule the budgets of states and cities, if not yet Washington. We had thought Obamacare would be the straw the breaks the camel’s back, since it represents the biggest new tax ever imposed on the American Middle class. It also comes at a time when the average American household can ill afford the 25%-or-more annual rate increases that have become a regular feature of the private insurance market. Incredibly, however, the stock market has continued to ascend, borne aloft by strong corporate profits that have in no way benefited the labor force. Equally astounding is that consumer spending has not collapsed. We attribute this to a shadow economy that exists and flourishes beyond the range of the tax collector.  Professor Edgar Feige, using estimates of currency in circulation both in and outside of the U.S., has estimated its size at $2 trillion. If so, it would help account for the resilience of retail sales, including autos and other big-ticket items, as The Great Recession drags on. For our part, we’ve grown tired of playing games with the bull. It has been our practice to attempt getting short at Hidden Pivot rally targets of significance. Although these targets have generally worked, accurately catching tradable tops, both pleasure and profits have been short-lived.  Indeed, targets that have taken months to reach give way

In last week’s commentary, we opined that Twitter’s shamelessly overhyped IPO was the bell that’s supposed to ring when the stock market is at a major top. But that was before we’d heard of Evan Spiegel, a 29-year-old Stanford dropout who has single-handedly one-upped Twitter in three separate categories:  greed, hubris and stupidity.  It’s not what Spiegel did, but rather what he didn’t do, that tells us that stock-market mania may be at  an epochal high. In case you missed the story, which ran above the fold in The Wall Street Journal last Thursday, Spiegel snubbed a $3 billion offer from Facebook for the company he founded, Snapchat.  You say you’ve never heard of them?  But then, why would you have?  The software firm makes a smartphone application that is used almost exclusively by teenagers to send messages and pictures to each other that disappear in ten seconds or less. Don’t you wish you were the genius who’d thought of this first?  (Question: Can the idea be adapted by a company that packages meals for dieters?) If you’re wondering where Snapchat’s profits will come from, you’re not alone.  Spiegel himself has yet to figure that one out.  Indeed, the company has no revenues, nor even a business model. But because there have been hundreds of millions of Snapchat messages flying hither and thither in cyberspace each day, that is deemed reason enough for the company to be in play as a red-hot buyout candidate.  Snapchat reportedly has suitors in China who are willing to invest at a level that would effectively value the company at $4 billion. But will even that be enough to satisfy Spiegel’s flamboyant brand of greed?  Perhaps not. He evidently thinks Snapchat’s user numbers have plenty more room to grow, and that the current, high levels

The price of gold has been falling for more than two years, alleviated by the occasional sucker rally and a stretch of tedium in 2012 that made the year tolerable at best for long-term investors. Any complacency they may have felt back then was not to last, however, for quotes fell a further 30% between February and June. And although they initially bounced back sharply with a 20% rally that got airborne last July, the respite for investors has been short-lived, having given way to a wearisome relapse since late August.  Our technical runes now suggest that a washout to $1125 is possible. That would represent a 15% fall from current levels – enough, presumably, to elicit the kind of despair we typically associate with bear market bottoms.  Not that things will necessarily have to get worse before they get better.  For if gold were to forge higher in the weeks ahead, exceeding the 1487.20 peak highlighted in the chart, it would be well-primed for a rampage to $2000. My practice is to keep an open mind about such things, although as an investor I try never to put myself in the position of having to hope for them. It’s not the technical side of the picture that should engage our earnest attention right now, but rather, ominous geopolitical rumblings. I credit my colleague Jim Willie with a visceral reminder that the global financial collapse is happening before our eyes. In his latest essay, Huge Cracks in the U.S. Financial Fortress, he sees a veritable armada of blacks swans threatening to undo the banking system.  This conclusion might seem extreme, especially to readers who believe such things only when they read about them in The New York Times or The Wall Street Journal. But only those who are blind to

Although we’d intended to promote a discussion of the Fukushima disaster here this week, perhaps it would be better to feature comedy rather than tragedy before we plunge into darkness, since “Japan’s problem” could soon mutate into the most serious problem the world has ever faced.  In the spirit of a Delta Tau Chi toga party, then, let us take a few more playfully sadistic whacks at Obummercare -- especially since the mainstream media have been doing such a lousy job of it.  Reading The New York Times, The Washington Post and other left/liberal news sources, one might get the impression that once the computer glitches are fixed, Obummercare will cruise to success. To the contrary, we believe the problems inflicted on America by the Affordable Care Act  (ACA) will only get worse. Much worse. For, once the dust has settled, it’s likely that the impact of  “The Worst Bill Ever” on the healthcare delivery system will make the current, computer-glitch phase seem like a romp in the park. To kick off this week’s discussion, some observations and predictions: We still believe the ACA will collapse all by itself, but that the process unfortunately will take too long to spare the U.S. economy from deepest recession. Not only will Republicans not be blamed for this, Ted Cruz will eventually be hailed as a hero. It is only in the dreams of a left-tilting, protect-the-king-at-all-costs press that voters would remember the government shutdown, let alone Obummercare-related snafus, as “problems” caused by Republicans. Obama, continuing his tenure as the worst American president in U.S. history, will take blame for nothing, as always .  To be perfectly clear, however, so cynical are we about the electorate that we believe Obama would be re-elected to a third term were it possible for him to