Connelly on Commerce

Content originally published on The Huffington Post

It’s been a good week or so for victimhood, especially if you are the Tea Party, any association using the label “Patriots” (except Tom Brady’s bunch in New England, and assorted other “good government” types on the political Right). Having campaigned against the president on the theme that his policies were essentially Christmas-candy give-aways to a misfit group of self-proclaimed “victims” (47%) who do not pay taxes, these organizations are railing against the IRS for having dared to single them out to challenge their right not to pay taxes.

Of course, the IRS had no business targeting just such groups for special interrogatories that also seem to have gone beyond what would be required to discern their tax -exempt status under Section 501(c0(4) of the Internal Revenue Code, which grants such status to social welfare organization that don’t mix too much direct politicking with their policy advocacy efforts. Indeed, why should the Tea Party be considered any differently for such tax purposes than the ACLU or the National Rifle Association? The substance of their political views should be irrelevant to such inquiries, so choosing to focus on them by means of “political profiling” is wrong at whatever level it occurred within the IRS. Not to mention stupid.

Now there is utterly no evidence that these actions were ordered, condoned or covered up by the President of the United States, as they were by Richard Nixon back in Watergate days. Yet a prominent Time Magazine columnist previously best known for writing “Primary Colors” about the Clintons under a false identity just got through writing that Obama is now “on the same page” as Nixon when it comes to the IRS.

Add to this the righteous (and the self-righteous) furor over the botched security arrangements, attenuated rescue efforts and misleading post-event TV talking points concerning the attack on the American facility in Benghazi and you have Senator Graham of South Carolina calling the situation reminiscent of Watergate; Senator Darryl Imhofe of Oklahoma opining that folks will soon start using the “I-word”; and Mike Huckabee predicting to his audience that the President will not serve out his term. Plus Dick Morris, who is even an impeachment era veteran, also has opined that the Obama Presidency is finished.

No commentary is intended here as to the legitimacy, the politics or the eventual likelihood of the impeachment or conviction of President Obama on charges of “high crimes” or “misdemeanors” relating to the IRS misconduct or the Benghazi mistakes (And Secretary Clinton is not around to impeach anymore – the political focus on her is more like an “advance impeachment” of a 2016 candidacy). The issue for us is, what does this all mean for the emerging US economy? Is the sudden prospect of genuine political upheaval in the US a good or bad thing for investors in the stock and bond markets?

If the Clinton impeachment period is any indication, it all might not so bad as one might think – maybe even pretty good. With both Nixon and Clinton, the whole matter of impeachment started after the president’s re-election and as the coming mid-term Congressional campaigns were set to engage. In the Clinton years in particular, the equity markets had begun an inexorable ride to the dot-com boom, starting with the famous Netscape offering in 1995 and running right through all the impeachment proceedings. In terms of the economy, only Alan Greenspan was minding the store, and he wasn’t “minding” much at all except for a couple well-chosen words warning about “irrational exuberance” (whereupon the equity market went up more).

It seems that the stock market at least this year has been again profiting from the benign indulgence of Federal reserve easy money, and a Chairman 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 now due sometime this fall. What better time, then, for Congress to have something else to do with itself once it finishes with immigration considerations this summer: something like an obsessive-compulsive trip down the impeachment road.

OK, it would be better if the House and Senate followed up a deal on immigration (which would probably itself good for the current economy and markets) by taking a real run at genuine tax reform. A deal on corporate taxes with repatriation of overseas profits, a modest lowering of rates balanced with loophole closing revenues and a serious program of entitlement reforms would be unequivocally positive for growth – but probably way too much to hope for in the wake of the new IRS controversy.

Thus we are left with the prospect of Congress becoming totally distracted from pursuing economic “remedies” by a probably pointless journey down the impeachment road for the bulk of the summer – pointless because there is zero chance to get the 2/3rds majority needed for conviction in the Senate given its current political make-up. (The House just needs a majority to bring impeachment charges.)

Although this sort of Washington summer may be just as unpleasant for the country as DC humidity, it could be a boon for the economy, at least under the Hippocratic principle of “First, do no harm.” A Congress too busy trying to force the President out of office prematurely to meddle further with the economy – even for just a few months – might be just what the doctor ordered to give the business community a period of slow, steady and predictable growth. Especially in housing and consumer spending – to encourage both capital investment and an uptick in hiring. The CEO community would likely see through the politics of an impeachment push, and just be grateful that the Congress has chosen not to fiddle with default crises and tax tinkering and meat-ax spending cuts that would only spook consumers and homebuyers and hiring officers.

If so, then the economy can maybe “party like it’s 1999.”

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Content originally published on The Huffington Post

Apart from John Bolton’s call for Obama’s impeachment over Benghazi, the 2016 election will probably be the next chance the Republicans will have to capture the presidency. With the current Benghazi hearings, they are trying to reduce the chances that Hillary Clinton will win the Democratic nomination and then ride her Teflon polling to an easy victory over whomever the GOP chooses.

The Republican field seems to be taking shape early — perhaps in part because permanent political campaign structures are now being mimicked by permanent media campaign coverage structures. Another reason is that the would-be kingmakers in the GOP primary process — Sarah Palin and Rush Limbaugh — are also laying out their respective criteria for rendering their ultimate judgments in anticipation of a weeding-out process that is likely to feature far fewer self-immolation “debates” and more intense voting calendars. These will even include simultaneous regional primaries that will give an advantage to those who get known “early and often” and show the most clout in terms of delivering results in the 2014 Congressional campaign.

The number of potentials is large: it will start out looking like the field of more than a dozen Kentucky Derby contenders that will get whittled down to a “Belmont stakes” group of long distance runners to fight it to the finish. And the biggest crowd, of course, is jockeying for position on the “Right” side of the track. (Mrs. Clinton is more or less conceded “pole” position among the Democrats, even as she prepares to deal with a somewhat muddy track brought on by the reports from Libya.)

The GOP field shows no clear favorite as yet; it includes some veterans of prior races as well as some maiden entries (literally and figuratively). Let’s consult the racing form as it stands just now.

Senator Kelly Ayotte of New Hampshire seems to have taken up the role vacated by Joe Lieberman as the third amigo of the SpongeBob and Square Pants of the U.S. Senate, John McCain and Lindsay Graham. None of these three has ever seen a Mideast conflict they didn’t want the U.S. to enter, although McCain has split off a little on gun controls while Ayotte and Graham are siding with Palin and Limbaugh on that issue — perhaps in part to make-up for their “liberal” ways on immigration. Ayotte still has to decide on that question, and if she goes with John and Lindsay, she will be crowded out on the Right and have to find a path through the middle of the pack (perhaps as a “favorite daughter” in her early home state primary).

Next comes Bush the Younger, originally considered Bush the Better but now maybe just the Bill Bradley of the Republican Party — former Florida Governor Jeb Bush. He made a false start at the gate with a less-than-clockwork book roll-out, but has staked a legitimate claim on education issues and is widely regarded as an ‘electable’ conservative if he can survive the primaries. Big Business prefers him but they don’t run the Party any more: no chance of a Palin or Limbaugh nod; also not so good being a “former” when so many other candidates are “current.” But he has a chance if he can get to the rail on a muddy track.

Dr. Benjamin Carter got some early attention by upstaging the President at a prayer breakfast. His sharp critique of all things ObamaCare gave the neurosurgeon a leg up on the Right outside gate, but then he got a little jumpy on their gay marriage issue by confusing it with pedophilia (he should have stayed at the prayer breakfast). Not a flaw that hurts with Limbaugh or Palin, of course, but it did knock him off the “outsider” pedestal formerly occupied by Herman Cain. He’ll have to raise his game to compete with the real hard Right pros to stand any chance.

Speaking of hard Right, is there anyone with a quicker pedigree in their terms than Senator Ted Cruz of Texas? Name rhymes with “boos,” of which he has heard plenty from the Left and Center — and anyone with seniority in the Senate. No less an authority on political stardom than James Carville has certified Cruz as the most up and coming, bold and talented opponent. While Democrats frame him as the Latin Joe McCarthy for his baseless “wife-beating” suggestion that Chuck Hagel might have been in the pay of the North Koreans, the Republican base just eats him up, and no one has yet raised his “birther” issue — heretofore so important among Republicans — because he was born in Canada. Democrats would give him a pass on that one just to see him in the race… and see what his savage tongue can do to bloody more experienced GOP opponents.

Then there’s Governor Chris Christie of New Jersey: no doubt Ted Cruz and others will attempt to take down this moderate “apostate” as quickly as they can so he doesn’t survive until a regional primary — perhaps in the old “Midwest” — that might cotton to his brand of union-bashing, media-bashing, budget-cutting but gay and immigrant friendly posture, not to mention his background as a criminal prosecutor and a guy who “tells it like it is” and “gets things done.” Limbaugh and Plain will overdo their hatred against this guy, and if Clinton looks like the opponent, Christie has a change on the inside if Bush steps away, and if his stomach surgery helps him get down to his high school playing weight (so folks don’t have to worry too much about who his VP pick is).

Now that we’re out of the C’s (and there isn’t even a Bachmann again for the B’s), we can jump all the way to the back of the alphabet (unless Huntsman comes back to haunt us), starting with the son of another 2012 veteran, Senator Rand Paul of Kentucky. He’s the candidate most willing to talk about being a candidate, and he’s out to capture the “Libertarian Right” flag early. In this way, he’s sort of immune to the Palin-Limbaugh endorsement game, because he inherits a pre-existing movement that doesn’t at the moment have another credible leader. Also, his stand on drones (not to mention joints) gives him an interesting appeal to younger voters his Party has failed to capture despite their resistance to being taken for granted by the Democrats. Immigration will be a key issue for him, too, as with Ayotte. Which way he leans will determine where he has to run on the track.

The next “P” in the Republican pod is o course Governor Rick Perry of Texas. This time he has homeboy Cruz to contend with, but Rick is still the “closet” pick of both Palin (he reminds Sarah of Todd on his good days) and Limbaugh (he reminds Rush of Jefferson Davis). But Rick lacks other confederates in the Party, and he won’t have Ben Bernanke to kick around any more.

The last “P” may be senator Rob Portman of Ohio: he’s a statesmanlike “adult” conservative with a gay offspring: all this probably disqualifies him, but could make a run if Bush doesn’t.

Senator Marco Rubio and Congressman Paul Ryan are both in the middles of the two biggest issues in Congress: immigration and the budget, but they’re not too busy to plan ahead for 2016. Ryan has already been around the track as VP candidate — but he has trouble remembering that Ayn Rand was an atheist, not a Catholic. In addition the improving economy is letting a little air out of his big issue — reducing the national debt. Economic “nature” is taking its course. Rubio has had the courage not heretofore seen in the Party to stand up to Limbaugh, going on Rush’s radio show to actually argue (respectfully) with the Pope of Republican Church in favor of immigration reform. Rush might even endorse him to hide the fact that he made mince meat of Limbaugh’s arguments!

Rick Santorum will bring his sweater vest back to the campaign if he can raise enough money, but he will find other Catholic contenders out front of him in that important respect. And Governor Scott Walker of recall fame might give it a go, if only to keep his name in focus for the VP slot (but Wisconsin VP’s haven’t fared well recently).

That gives us a solid dozen candidates at the gate. And there have been a few early “scratches” who might rehab and get in: Bobby Jindal (suffering a popularity gap in Louisiana due to fumbling tax reform), and Bob McDonnell of Virginia, who has some explaining to do about campaign and finance and wedding catering. Scott Brown might even try the ultimate comeback — no more audacious than Sanctum Santorum after he was dumped from the Senate. Fifteen’s probably enough!

But what about Newt, you say? Did we forget? Yes, we forgot Gingrich. On purpose.

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Note: Content originally published on Yahoo! Finance

It’s baseball season, so superstition is back in fashion in the stock market – not least, the old chestnut, “sell in May and go away!” And this little rhyme is not really like wearing the same socks to keep a win streak going; indeed, it’s all about knowing when to “fold” on the 2013 equity winning streak, take your cash and head to the beach. And there are even some statistics that bear out the claim that stock market returns in the May-September period do tend to run lower than over the remainder of the 12-month cycle commencing on May Day.

But as Rex Kramer (Robert Stack) warned us so memorably in the immortal movie, “Airplane,” when the hero pilot suggested an apparently obvious life-saving maneuver: “No, that’s just what they’ll be expecting us to do!”

Trusting the conventional wisdom

In this case, as in the past three years when “sell in May” seemed to work right (at least until about July), “they” are the hedge funds and other money managers who missed the Q1 rally in stocks and want to get back in on the cheap to bring their performance at least in line with market indexes – which don’t charge for their services. These folks have been praying (loudly and with many acolytes among market commentators) for a “correction” in the market of five to ten percent to give them a chance to buy low and sell high after the next rally, which happened to come along in late summer each of the past three years! Fool us once, its your fault; fool us four times in a row – maybe we should listen to Rex!

Why should those who actually got the market right in Q1 cash in their hard-earned profits just to give hedge funds a leg-up to correcting their relatively poor performance in the same period? Why give them the profits that will accrue after the market sells down ten percent or so as it did the past three years in Spring just to come bouncing back when the various Armageddon scenarios conjured up in May didn’t quite materialize. Greece didn’t implode (neither will Cyprus); Germany didn’t abandon the euro (it won’t this year either); Italy and Spain didn’t sink under the weight of their borrowing costs (they won’t in 2013); the euro didn’t go to parity with the U.S. dollar or collapse altogether (it’s still around at nearly the same relative value as it has held for three years).

And why is it that only declines in the stock market are termed “corrections” – as if only downside moves are “correct” while upward moves are by nature “incorrect?” The short sellers tend to dominate market terminology in ways that tilt to their objectives, largely because ordinary investors don’t short stocks and don’t realize that market pessimists are no more inherently credible than incorrigible stock promoters. A more judgmentally useful vocabulary would focus on more neutral terminology like market “consolidations” or “retracements” that don’t imply that sell-offs are inherently “correct” reflections of economic reality.

This is especially true when the market hits a new five-year high. The proposition that this event calls for a “correction” presupposes that something is amiss when the aggregate value of the market finally climbs back to where it stood just before the financial house of cards we were living on collapsed. Is the aggregate value of public corporate America seriously not worth a dime more than in 2008? Corporate balance sheets are in much better shape, they’re flush with cash, earnings have set records daily, and phony leverage has been largely washed out – why wouldn’t all those adjustments justify a higher market multiple?

Still, a fall is possible

And yet … there are potential circumstances that could trigger truly significant falls in the market averages. Let’s look at some of them and rate the chances that such a “sell in May” event might really occur this time instead of the phony “sky is falling” tales we were told in 2010, 2011 and 2012.

1) The Federal Reserve begins to dial back its bond-buying program “early.” The chances of this occurring have been reduced from a month ago by tame inflation plus the lackluster jobs, manufacturing, durable good and GDP reports over the past couple of weeks. The Fed “hawks” can make that the overall economy is approaching “escape velocity,” and the half-percent cut in GDP attributable to “Sequester Anxiety” alone (even before the actual cuts hit) makes the case just the opposite.

2) Another “flash crash” hits stock exchanges, not just an individual stock as has just happened with big public tech companies like Google (GOOG) and Symantec (SYMC). This would be an especially troubling May-time anniversary, especially if it seemed the result of a cyber attack designed to disrupt markets. It probably has only a little more likelihood than the Fed-changing course – but certainly can’t be ruled out. And it would take a longer time for recovery – not a “flash in the pan.”

3) Another terror attack on a public event: the Kentucky Derby, the Indy 500, the NBA playoffs – one of these the markets can absorb, but another in short order could unleash a much broader “risk-off” mentality far beyond the stock markets.

4) Another, deeper banking sector crisis born of unanticipated trading losses. Last time around only Jamie Dimon paid a public relations (and compensation) price, and even the large sums lost were within JP Morgan’s (JPM) earning power. If a major European bank were to suffer severe distress, however, the euro authorities have not yet cooked through the mechanisms needed to keep contagion from spreading. Then we really would face a euro currency at serious risk of collapsing, with adverse and immediate consequences for all the worlds’ economies.

5) Finally, the biggest risk of all: Syria spinning out of control beyond its borders and triggering responses ranging from Tehran to Tel Aviv to Washington and Moscow. Markets need beware of red lines as much as red ink. This is the space that bears most watching as we enter May.

It’s baseball season, so superstition is back in fashion in the stock market – not least, the old chestnut, “sell in May and go away!” And this little rhyme is not really like wearing the same socks to keep a win streak going; indeed, it’s all about knowing when to “fold” on the 2013 equity winning streak, take your cash and head to the beach. And there are even some statistics that bear out the claim that stock market returns in the May-September period do tend to run lower than over the remainder of the 12-month cycle commencing on May Day.

But as Rex Kramer (Robert Stack) warned us so memorably in the immortal movie, “Airplane,” when the hero pilot suggested an apparently obvious life-saving maneuver: “No, that’s just what they’ll be expecting us to do!”

Trusting the conventional wisdom

In this case, as in the past three years when “sell in May” seemed to work right (at least until about July), “they” are the hedge funds and other money managers who missed the Q1 rally in stocks and want to get back in on the cheap to bring their performance at least in line with market indexes – which don’t charge for their services. These folks have been praying (loudly and with many acolytes among market commentators) for a “correction” in the market of five to ten percent to give them a chance to buy low and sell high after the next rally, which happened to come along in late summer each of the past three years! Fool us once, its your fault; fool us four times in a row – maybe we should listen to Rex!

Why should those who actually got the market right in Q1 cash in their hard-earned profits just to give hedge funds a leg-up to correcting their relatively poor performance in the same period? Why give them the profits that will accrue after the market sells down ten percent or so as it did the past three years in Spring just to come bouncing back when the various Armageddon scenarios conjured up in May didn’t quite materialize. Greece didn’t implode (neither will Cyprus); Germany didn’t abandon the euro (it won’t this year either); Italy and Spain didn’t sink under the weight of their borrowing costs (they won’t in 2013); the euro didn’t go to parity with the U.S. dollar or collapse altogether (it’s still around at nearly the same relative value as it has held for three years).

And why is it that only declines in the stock market are termed “corrections” – as if only downside moves are “correct” while upward moves are by nature “incorrect?” The short sellers tend to dominate market terminology in ways that tilt to their objectives, largely because ordinary investors don’t short stocks and don’t realize that market pessimists are no more inherently credible than incorrigible stock promoters. A more judgmentally useful vocabulary would focus on more neutral terminology like market “consolidations” or “retracements” that don’t imply that sell-offs are inherently “correct” reflections of economic reality.

This is especially true when the market hits a new five-year high. The proposition that this event calls for a “correction” presupposes that something is amiss when the aggregate value of the market finally climbs back to where it stood just before the financial house of cards we were living on collapsed. Is the aggregate value of public corporate America seriously not worth a dime more than in 2008? Corporate balance sheets are in much better shape, they’re flush with cash, earnings have set records daily, and phony leverage has been largely washed out – why wouldn’t all those adjustments justify a higher market multiple?

Still, a fall is possible

And yet … there are potential circumstances that could trigger truly significant falls in the market averages. Let’s look at some of them and rate the chances that such a “sell in May” event might really occur this time instead of the phony “sky is falling” tales we were told in 2010, 2011 and 2012.

1) The Federal Reserve begins to dial back its bond-buying program “early.” The chances of this occurring have been reduced from a month ago by tame inflation plus the lackluster jobs, manufacturing, durable good and GDP reports over the past couple of weeks. The Fed “hawks” can make that the overall economy is approaching “escape velocity,” and the half-percent cut in GDP attributable to “Sequester Anxiety” alone (even before the actual cuts hit) makes the case just the opposite.

2) Another “flash crash” hits stock exchanges, not just an individual stock as has just happened with big public tech companies like Google (GOOG) and Symantec (SYMC). This would be an especially troubling May-time anniversary, especially if it seemed the result of a cyber attack designed to disrupt markets. It probably has only a little more likelihood than the Fed-changing course – but certainly can’t be ruled out. And it would take a longer time for recovery – not a “flash in the pan.”

3) Another terror attack on a public event: the Kentucky Derby, the Indy 500, the NBA playoffs – one of these the markets can absorb, but another in short order could unleash a much broader “risk-off” mentality far beyond the stock markets.

4) Another, deeper banking sector crisis born of unanticipated trading losses. Last time around only Jamie Dimon paid a public relations (and compensation) price, and even the large sums lost were within JP Morgan’s (JPM) earning power. If a major European bank were to suffer severe distress, however, the euro authorities have not yet cooked through the mechanisms needed to keep contagion from spreading. Then we really would face a euro currency at serious risk of collapsing, with adverse and immediate consequences for all the worlds’ economies.

5) Finally, the biggest risk of all: Syria spinning out of control beyond its borders and triggering responses ranging from Tehran to Tel Aviv to Washington and Moscow. Markets need beware of red lines as much as red ink. This is the space that bears most watching as we enter May.

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Content originally published on The Huffington Post

1. Why didn’t background checks pass the Senate? Not just because the 10 percent of the population that fears them (thanks to Rush Limbaugh’s hold on that percent of the population) happens to live in States where key Democrats and Republicans are up for re-election (or thinking of running in 2016 Republican primaries). More important is the fact that there is simply no evidence that expanded checks could have been even voted on in the House of Representatives, and therefore the market value of a “courageous vote” would have been absolutely zero. Courage that loses would have left those senators with no accomplishment to counterbalance the millions of dollars in ads that would have been run against them. If you want to reconsider and win on background checks, create some pressure to at least assure a vote in the House.

2. Why did the Boston bombings not immediately derail the immigration reform process? Not just because key members of Congress are already out over their skis in support of a comprehensive compromise. More important is the reality that key business and church leaders have joined establishment media in coming out against the status quo. The Chamber of Commerce, Silicon Valley, the banking community have joined up with Catholic and evangelical leaders — to support the type of reforms advocated by the “gang of eight.” All of them are highly influential with the Republican Party that heretofore has been basically aligned with the “self-deportation and border fences only” position. The last time business, churches and the core media effectively turned the tide of political opinion was the case of the Vietnam War. Its time has come again.

3. Why did Russian intelligence tip us off to the Boston bomber, and then clam up? Nobody in Moscow was particularly trying to do us a favor. The Russians are rightly concerned about Chechen radicalism in terms of their own safety, and they really wanted us to do their homework (and maybe their dirty work) for them in the U.S. The FBI and CIA were no doubt quite aware of that, and were rightly circumspect about getting used in an internal Russian game. Notice that, after the bombing, Russian security agencies have essentially behaved as if they had been read Miranda rights. More cooperation would be helpful now, and the apparent release of Russian wiretaps of the bombers’ mother’s conversation with the elder son is a step in the right direction. Although it would have been good to know about those conversations in 2011!

4. Why are so many commentators on cable TV or the business media trying to talk the stock market down with predictions of a “Spring swoon” or the need for a market “correction” of 5-10 percent or more declines? Not just because the economy turned somewhat softer in March in terms of business activity (after all, even with tax increases consumers kept spending): or more problems in Europe (what’s new?); or the slowdown in China (from 7.9 percent GDP to 7.7 percent!). The real reason is that a lot of very well-placed hedge funds missed the market rally in the first quarter because they again traded on ideological terms — they hate Obama and think the best way to discredit him is to have the market go down, whereas it has more than doubled since his election). These powerful hedge funds have a lot of friends (and fellow “short” investors) who will trot out the same stories about the sky falling that have produced three straight “Spring swoons” in 2010, 2011 and 2012 — and three straight market rallies that bailed out the hedge funds in the following months. Fool us four times, it’s our fault. Even businesses got sucked in by faulty predictions that the Euro would crash, that Germany would leave the EU, that China’s economy would collapse, that U.S. inflation would rage out of control: one of them happened.

5. Why aren’t the Republicans again out threatening a U.S. default for this summer unless they get another round of austerity budget cuts to Social Security and Medicare? Not just because austerity has become such a “European thing” that the party of American exceptionalism is starting to have second thoughts, or that they have noticed how unpopular Obama has become with seniors for suggesting even he would do some such cuts as part of a budget deal as long as he could cut tax entitlements for the rich. More important is the fact that some key members of the Party have decided that the chances for historic tax reform involving really big rate cuts for individuals and business (coupled with simplification of the tax code to eliminate a wide range of deductions) might be politically achievable in this session of Congress — especially if immigration reform makes it through. At bottom, the best chance for both Parties to “hold serve” in the 2014 elections (Republican keep the House, Democrats the Senate) is to have a record of real accomplishment by fall of next year, and a less confrontational atmosphere over the debt ceiling and U.S. default would be conducive to that outcome. The debt ceiling could be extended past the next election with the condition that tax reform would be enacted by that time: sort of a “sequester-in-reverse.”

6. Why is Marco Rubio going on Rush Limbaugh’s radio show and actually arguing with him (over immigration reform). Rush has been publicly counting on the freshman senator with presidential ambitions to actually be the one who torpedoes reform by pulling out of the “gang of eight” at the last minute because he isn’t satisfied on border control. But Rubio gave no sign of that in his radio interview, and overtly took the other side in his answers to Limbaugh’s pointed and leading questions. The reason isn’t that Rubio’s appeal is based on his Hispanic roots and he doesn’t want to burn his base. More likely, Rubio and other 2016 aspirants (including both Rand Paul and Chris Christie) have finally figured out that Rush’s act does them harm, not good. It is in Limbaugh’s interest to not have a Republican elected president in 2016, or any time for that matter. His act depends, ironically, on convincing his audience that he and they are the real “victims” in American life, and that can’t happen if Republicans control both Congress and the Presidency. So watch for more Republicans to put distance between themselves and “el Rushbo” — no longer “the most interesting man in the world.”

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Content originally published on The Huffington Post

One can perhaps understand why the New York Timeshas its nose out of joint about online anything, given the destructive impact of Google and its progeny on the traditional newspaper business. At least that is an online subject which the Times can rightly claim some degree of actual knowledge.

The March 30, 2013 editorial decrying the proposal in the California State Legislature to require expansion of online offerings in the California State University system, however, exposes the Times‘ outright ignorance of the reality and potential of Web-based learning to break the “graduation gridlock” that afflicts not only California’s but the rest of America’s higher education establishment.

The college dropout rate in the United States is 45 percent — the same as our worst inner-city high schools! It takes an average of six years for American students to finish college today, for three main reasons: budget cutbacks cancelling course offerings required for graduation, tuition increases that rival even the rising cost of health care, and students bring forced to attend only part-time so they can work while they study and thus avoid the crushing burden of student loans on their future livelihood. This disgraceful performance consigns America to a “playing from behind” economic future when it comes to having the numbers of college graduates it needs to fill the jobs of the future. Never mind today’s high unemployment rate: college-skilled jobs are already going begging in science and engineering — and just wait until the full brunt of baby-boomer retirement hits later this decade!

All three of these impediments to restoring America’s world leadership in college degree completion can be alleviated by adding online course delivery to the course profiles of public (and private) universities. Once past the initial investment, online courses now price in the private education market at levels equivalent to in-person courses, which means such courses can be a reliable revenue source for cash-strapped university budgets. Moreover, by expanding enrollment to those “shut-out” of in-person courses by space constraints not applicable on the Web, tuition increases can be moderated or even held flat. By enabling students to keep up their study from home at all hours, online courses can also help those who must work while they go to school to both make ends meet and persist to graduation.

The legislators of California have figured all this out, and have had the courage to take on faculty resistance to online courses (professors will have to learn new methodologies and be more available with online “office hours” to answer student questions ). But the Times turns a blind eye to these benefits and instead swallows whole the propaganda of traditionalists that, as the editorial writer grandly concludes, “Online courses as generally configured are not broadly useful.”

It is truly odd to see the Times, which has rightly decried “junk science” denial of global warming, accept without evidence that online courses are “junk college” (maybe it’s professional jealousy of theWashington Post, whose parent company’s only profitable business is Kaplan, an online university!).

The Times doubles down with the further assertions that online courses “are potentially disastrous for large numbers of struggling students who lack basic competencies” including the more than 60 percent of first time freshmen in the Cal State System (which does not include Berkeley, UCLA and the other well-known flagship “UC” schools) who need remedial instruction in math, English or both.

The truth is that online courses can be very effective helping students narrower skill sets transition to college expectations, and if properly structured, can actually produce better results in terms of learning “absorption” and “retention” — two traditional measures of learning outcomes — than traditional in-person courses. Online courses that offer similar credits in time-frames shorter than the typical “semester” — and using the time saved to focus on “one course subject at a time” have been shown in multiple published studies to produce equal or better results than the ordinary lecture hall.

The Times, in short, is behind the times. The scores of public and non-profit private universities that have adopted online learning best practices have shown that everything from remedial algebra to Ph.D.’s in Psychology can be taught successfully online. There is no need any longer to look for proof of learning performance to the checkered track record of for-profit colleges, which pioneered online learning but coupled it with boiler-room marketing practices and shoddy student support systems. The Times‘ blanket rejection of the extraordinary work of Penn State, Villanova, UMass, Maryland, Indiana, Central Michigan, Georgia Tech, Regis, Marylhurst, Golden Gate University and others (not to mention MIT, Stanford and other “MOOC” entrepreneurs) should not and will not be the last word on the State of California’s new openness to funding online access to college degrees.

The Times‘ editorial writers, it seems, just did not do their homework when before drafting their editorial. They it should have at least done enough research to understand that the state legislators whom they mocked for willingness to use the Web to advance the world’s most long-standing “knowledge industry” were taking their lead from such distinguished educators as Mark Yudoff, outgoing Chancellor to the UC System, and Dean Christopher Edley of Berkeley’s School of Law.

These leaders understand that the very students who need the most remedial help are also part of a generation that uses the Web routinely in their daily lives to buy (and even sell) good and services, connect with relatives, friends and other “likes,” listen to their favorite music, and keep up with the “tweets” of their athletic and media heroes.

This is not to suggest that the traditional bricks and mortar of college campuses is going the way of Borders Books (or heaven forbid, print media). But right now, only 16 percent of all U.S. college students are following the traditional path of 4-year attending to earn degrees at residential colleges. The rest are working their way through in non-traditional settings – in most cases while working part- or even full-time. They’re not visible at the sporting events we watch hooting and hollering at sports events every weekend of school year – those folks are the privileged few. A good many of the rest are bent over their laptops and tablets, at all hours of the day and night, in remedial math, MBA programs, corporate-sponsored graduate programs or even doctoral-level courses. Do all all these students, on whom our future economy depends, deserve to be labeled by the Times as junk graduates?

For the vast majority of today’s actual college students, online is a lifeline to degree completion when done right. It is a godsend for working and single mothers trying to fit courses into their demanding lives. That the Times managed to ignore these realities in order to cast undocumented aspersions on Web-based learning will not be a proud day in the history of Times‘ editorials.

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Note: Content originally published on Yahoo! Finance

It seems that the austerity police of the eurozone – the “troika” comprised of the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF) – have finally made the Cypriot government an offer it can’t refuse, and a deal has emerged to spare the island the complete collapse of its banking system and ignominious exit from the euro currency.

The idea of taxing the entirety of the Cypriot banks’ deposit base to fund a Cypriot ”bail-in” to cover about $7 billion of the current deficit to creditors while the eurozone and IMF funds about $10 billion was put aside in favor of a drastic direct “haircut” (at a much higher percentage – even up to 40% or more – than the proposed tax) of deposits in the nation’s two largest banks over $100,000 (of which there are many, particularly Russian in origin). These depositors wind up being treated like unsecured bondholders in the second largest bank (Bank Laika) who also will take a haircut not unlike their Greek counterparts a year ago. Meanwhile, Bank Laika itself will effectively be wound up, with its only good assets being transferred to the larger but also very shaky Bank of Cyprus, which barely survived and will be severely downsized (along with its depositors accounts).

A Long Time Coming

Now all this may seem like just desserts for a country that allowed itself (to paraphrase an old description of Monte Carlo) to become a “sunny place for shady deposits” – a combination laundry facility and parking garage for offshore funds fleeing the tax man in their respective counties of origin. The size of these deposits was sufficient to limit the needs of the Cypriot banks for external bondholder funding compared to other such banks around the world. In the end, there weren’t enough of them to haircut to raise the local funds that Germany and other eurozone countries demanded as a price of their continued financial help and the ECB’s emergency liquidity lifeline that until last week had kept the Cypriot Banks open for business.

The origin idea to tax the depositors fell on its face as a result of backlash by those who saw it as a repudiation of eurozone commitments to “insure” deposits at least up to $100,000, made in the earliest days of the eurozone debt crisis and implemented by national governments. The haircut is worse in financial terms for the depositors, but it “saves” the $100,000 red line (although the insurance concept in technical legal terms only applied to shield deposits from the effects of bankruptcy, not the potential for a new form of “wealth tax” – which is hardly a new idea in pan-European taxation circles). Moreover, there is precedent for haircuts in exchange for bailouts – just substitute the word “depositors” for “unsecured bondholders.” Such is the nature of eurozone demands for “private market involvement” as conditions for (German) taxpayer-funded bailouts which the Germans swore off after they “one-offed” it in the case of Greek bondholders; and now have swore back on in the case of Cypriot deposits which exceed the $100K red line – consistency seems no longer a Germanic virtue, except that they consistently label each such action a “one-off”).

But before we break into a chorus of “Don’t Cry for Me, Nicosia,” we need to look beyond the shores of the island state and consider the more global effects of yet another Sunday night deal that avoided another Armageddon Monday for global financial markets.

Global Impact

While bank depositors in Spain, Italy, Portugal, et al may be sleeping a bit easier as the concept of a baseline “deposit insurance” has apparently survived, US hedge fund managers may toss and turn a bit more this week. Many of them have significantly underperformed the US equity market as the first quarter of 2013 draws to a close. The last-minute Cyprus deal will make it harder for them to talk down the market to their level in the critical last week of March by predictions leaked to the markets of the immanent collapse of the euro currency down to parity with the US dollar or worse, the exit of Cyprus from the eurozone and its imminent collapse, the return of a fed-up Germany to the Deutschemark, a run on the banks of Italy and Spain leading to “contagional” runs in the US, etc. They have plenty of “market commentators” (i.e., actual but not necessarily-disclosed short-sellers) to do their bidding on cable TV by predicting the immediate onset of a 5-10% “correction” – and, by the way, why is it only downward moves are so “correct?”

For the past three years, such scare stories about Europe have triggered springtime US market sell-offs ranging to 13%. This year they have been peddling the nonsense that the market, now reaching levels not seen since the peaks of 2007, has “come too far too fast” – but do we really believe that the collective value of US public companies is not worth a dime more than it was five years ago just as the mortgage finance mess was beginning to hit the fan?

And they have been buttressing their case for the coming market meltdown by trumpeting the canard that share trading volume is tepid and downright down – which is true in share count terms, but not in dollar volume terms, because very few companies split their shares anymore when share prices reach triple digits — think Apple, IBM, Netflix, Amazon, Priceline, Intuitive Surgical, Salesforce.com, Chipotle, to name just some of the high flyers. Indeed, there have also been a rash of reverse splits in the banking and tanker industries. As a result, the average price of public equity shares, at $63.64, is now nearly double what it was five years ago. Of course share trading volume is down, but dollar volume is another matter altogether when you need to spend twice as much to buy the same average share volume! Funny how “market commentators” have such trouble with third grade math!

Imagine the Alternatives

At least for the time being, however, the hedge fund acolytes will not be able to add a Cypriot sky is falling story to their “talk it down” agenda this week. There may be many reasons for the market to “correct,” even before the quarter is out, but let them be reasons based on data and actual corporate performance fundamentals, not just the latest Armageddon story line peddled by those traders who have bet wrong for four consecutive first quarters.

Finally, Cyprus is significant in one more important respect: let those who railed against the TARP forced bank bailouts in the US in 2008 look at the descent of Cyprus into a “pre-modern” cash and barter economy in the days prior to the final deal when all local trust in the banking system evaporated. Imagine a US economy where no merchant would take your credit card, where no contractor would take your check, where the ATM gave out no more than $100 (if anything at all).

Although myriads of candidates across the country railed against TARP in 2012 and promised they would never have voted for it, the Cypriot “weekend without credit” teaches us that the unlikely coalition of George W. Bush, Hank Paulson, Tim Geithner, Ben Bernanke, Nancy Pelosi, Harry Reid and Barack Obama probably did us all a lasting favor!

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Content originally published on The Huffington Post

Obama got his tax rate increase for the top 1 percent in the fiscal cliff” resolution in January, and Speaker Boehner got his forced budget cuts with the sequester, and both have apparently silently agreed to finesse the end-March “continuing budget resolution’” without another “government shutdown” moment by simply living with the agreed budget for the balance of this fiscal year (including the sequester effects), with only a relatively minor skirmish about the president’s authority to move cuts around the Pentagon.

It’s an odd sort of standoff. The president is swallowing significant cuts to discretionary social programs as a cost of his insistence of closing tax loopholes as part of any deal; Boehner has given up securing significant cuts to entitlement growth offered by Obama in order to appease his anti-tax base and Wall Street hedge fund and private equity managers (the now-preserved “carried interest” privilege that gave Mitt Romney his 14 percent tax rate). With the sequester’s $1.2 billion in cuts over 10 years now added to the previously agreed $2.5 billion in reductions in expenditures (including the war wind-downs and lower interest bills), we are now only $300 billion away from the $4 trillion in deficit reduction targeted by Simpson-Bowles — and that’s without counting the $600 billion tax increase that came with the fiscal cliff arrangement.

There is no way that the Republicans can now back out of their “pro-loophole” corner without being seen to capitulate to the president on the sequester, and the same for the president on his “anti-loophole” stance, so there can be no progress to a deal as long as we are talking about just the sequester, no matter how loudly those affected scream about the cuts. Long lines at airports, closed national parks, kids home from day care and reduced cancer research will not sway the Tea Party Republicans who “won” this round (although they lost on their effort to cut entitlements).

But if entitlements were to be added to mix (as both Obama and Boehner agree would be preferable), if tax reform is urgently needed (ditto) and if there are egregious loopholes that could be closed as part of such reform (as Obama continues to agree and Boehner at least used to agree as of two months ago), then there is actually a chance for a bargain that could in the overall mix address most if not all of the stupidity involved in the sequester cuts (many of which will actually wind up costing the government money in the long run, at least in terms of higher unemployment benefits).

The opportunity to put all these matters on the table could come with the return of the “debt ceiling” deadline late this spring — which started this whole mess back in 2011 when everyone agreed to the sequester as a way to address Republican demands for “dollar-for-dollar” budget cuts to raise the debt limit and prevent default. Boehner now has his “discretionary” budget cuts, so what he has left to ask for are reductions in “non-discretionary” items like Social Security and Medicare. Obama has his tax rate increase, so what he has left are the loopholes: and the sense that Boehner and the Republicans do not have the stomach to again put the nation at risk of default, which they paid a heavy price for in the 2012 election and in their popularity with the public.

The cover for both sides to meet somewhere in the middle and satisfy both their interests (apart from Tea Party die-hards) could well be the umbrella of “tax reform,” particularly since both Social Security and Medicare are deeply entwined with our overall federal tax system. While no adjustments in their respective taxes are really on the table, COLA adjustments and means-testing — as well as future eligibility ages — will be. The president will never go along with Congressman Ryan’s “voucher” plan for Medicare — we don’t hear much about that since the election — but he is now prominently on record as offering to deliver his party on COLA and means testing cuts. Republicans can no longer argue, as they have during the sequester debate, that Obama “won’t touch entitlements.”

A tax reform package — with rate cuts for corporations and individuals — could give Boehner enough cover to respond to public outcry over the sequester cuts and give on loophole closing if he can claim credit for “forcing” entitlement cuts in return. It will be a bit harder for the Tea Party to side with Wall Street (i.e., Cayman Island) hedge funds by rejecting the very entitlement cuts that were a core element of their “platform” with nearly $4 trillion of budget cuts already in hand: that should be enough to cover the next step up in the debt ceiling if entitlement cuts are in the mix.

Of course all Washington will focus on the “devil in the details” of any tax reform deal — Obama has to win something on trimming tax benefits for companies that shift jobs overseas, just as Boehner will need to deliver on some form of tax-reduced repatriation of the trillions currently held overseas by American exporters of goods and services and intellectual property. But both sides can live with deals on these issues if the overall package is sellable to their broader constituencies (not just their “bases”). And the resulting tax system cannot be held to a strict “revenue neutral” posture but instead must contribute some “additional” revenue toward reducing the deficit: That would be a “give” by Boehner that must be enticed by a serious enough change in entitlement structure “down the road” to allow him to claim a real victory, as the president will surely do on the “closing the loopholes” issue.

All during this period, the Federal Reserve will continue to give the politicians time to work something out by keeping floor under the stock market and a cap in interest and mortgage rates with their bond-buying “QE.” But that won’t last much beyond this fall, so no deal on entitlements and taxes means this issue will go to the 2014 election. That said, the other major factor working in favor of some fiscal compromise will be the improved chance for actual Congressional votes on immigration reform and gun-related legislation. Any victorious compromises on those fronts will set a tone of bargaining success that will be hard for both the Tea Party and the far left to stand against.

At the end of the day, a benign result will turn on whether any deal is actually “balanced” — not in the same sense Obama has used the word in terms of cuts versus taxes — but rather in terms of political wins for each side. So far both sides have only have wins that are in large part losses.

The road to a “win-win” will run on the rocky ground of tax reform, and through the phantom tollbooth of the debt ceiling — just as it always has.

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Note: Content originally published on Yahoo! Finance

In the hours following the February 20 release of the Federal Reserve’s Open Market Committee January 2013 meeting, US equity markets dropped over one percent reversing a steady upward climb that had persisted since the swerve around the “Fiscal Cliff” at the start of the year (except for a brief flutter down in early January when the minutes of their previous meeting in December were released).

What is it about Fed minutes that give “commentators” (many of whom are notorious short sellers) ammunition to talk down the markets so they can shake stocks out of weak hands and then buy them cheaper? In this case, it was the “revelation” that there were voices on the Fed that had doubts about the cost-benefits of the Quantitative Easing program of $85 billion per month government debt and mortgage bond purchases that the Central Bank has undertaken to stimulate extension of cheap credit to businesses and householders and thereby encourage hiring.

Given that the Fed’s QE program is both unconventional and unprecedented, no one should have been surprised by the lack of unanimity among the Fed’s regional presidents and board of governor: Certainly no one who had read the published minutes of the previous Fed meeting in December, where similar voices were recorded. But no one should have forgotten that at both the past two meetings, the Fed has pressed ahead with the QE program (initiated last September despite the pressures of the high political season), with no changes.

Despite the qualms shown by “a number” or “several,” the final vote was decisive (indeed, with only one dissent most recently). Yet the “commentators” suggested that those same minutes meant that the Fed was about to change course and reduce its easy money policies (either “prematurely” or “at high time,” depending on the commentator’s point of view)!

Moreover, few of those commentators paid close enough attention to whether the reported qualms about QE were expressed by “participants” in the meeting – which refers to the whole group around the table, whether or not they are current voting members of the Open Market Committee (which for example only includes five of the twelve regional bank presidents each year, on a rotating basis) or actual “members” of the Committee. A close reading of the comments referencing this distinction could shows that the most recent minutes are actually more dovish overall than in December – just the opposite of what the stock market was led to conclude. Qualms of non-voters would be just that – qualms – not decisive “turn signals.”

Change Is Unlikely

This is not to suggest that there are not real and persistent divisions on the Fed about whether QE is more trouble than it is worth, or that the argument in that direction is without merit. But it is wise to remember that the current Fed Chairman has never embraced his predecessor Greenspan’s passion for opacity and at least nominal unanimity.

Bernanke was chair of an economics faculty: as a dean emeritus myself, I can suggest that deans and chairs learn very early not to expect unanimity or even consensus on their faculties, but merely room to make decisions that faculties themselves often are loath to make. Faculties like to be heard and like to be sure the dean or chair gives them room to express their views and doesn’t get out ahead of them in terms of that opportunity. Bernanke has been meticulous in following that pattern in his Fed Chairmanship. The market needs to finally understand that this Chair can live with even public dissent if he has enough support to “work his will” (as Bob Woodward might say if he chose to write about the Fed Chair rather than the Oval Office occupant). And Bernanke’s will is to continue his QE program until there is evidence of substantial improvement in the outlook for employment (you can find some of his very own phrases in the minutes, too).

The Chairman is highly unlikely to change course and sacrifice his legacy in his last year in office to bend to the views of the bank president from Kansas City or Dallas; it’s not their legacy, yet, nor is it likely to be. And Obama is likely to appoint either Vice Chair Janet Yellen or someone with her outlook as Bernanke’s successor, and she often foreshadows Bernanke’s leadership direction in her public comments – in fact, her speeches between meetings are consistently better clues to the Fed’s direction than the minutes of past meetings. And she has come down clearly in favor of continued easing until the Bernanke target is met.

Expect QE to Continue

The Chairman himself unambiguously (and predictably) reaffirmed the Fed’s commitment to continue QE until the employment outlook substantially improves in his semi-annual report to Congress on February 26. After the minutes were published, Jim Bullard, St. Louis Fed president and noted “centrist” in terms of the Committee’s “hawk/dove” divide, had affirmed on CNBC that the Fed would stay “easy” for a long time forward, clearly foretelling the posture Bernanke took just a few days later.

The notion that the minutes instead foretold a change in Fed policy should have also failed a simple test of policy logic in light of the budgetary showdown on Capital Hill, which right now seems heading for a round of fiscal policy tightening with the Sequester, government shutdown and deferred “debt ceiling” renewal all coming up between March and May. In the face of what looks to be a default by Congress to a policy of fiscal austerity well before we have economic recovery, it would seem that the Fed would in no way take such an occasion to change course away from monetary accommodation that had just been approved by an 11-1 majority in favor of Bernanke’s course.

Chairman Bernanke has repeatedly made clear that he takes the Fed’s employment mandate as seriously as its monetary stability mandate, and the Sequester alone is a likely job killer – not to mention a government shutdown and any renewed debt ceiling crisis. By the time the Fed reviews its bond-buying program at its mid-March two-day meeting, the markets may come to view the Fed as the only sane institution left in Washington.

Why the Rally?

So with recent Fed history, Bernanke’s public commitments, policy logic and the simple mathematics of the Chairman’ overwhelming working majority of voting Fed members, why did the markets think the minutes signaled that the Fed was losing faith in (and about to change) its QE policy so wrong – as evidenced by the huge market rally right after Bernanke clearly shot down that interpretation before Congress?

Well, consider what happened to the stock of Home Depot (HD), a Dow component due to report earnings the day after Bernanke’s scheduled testimony – earnings that were widely expected to be stellar in the wake of a reviving housing market. Before the minutes were released, Home Depot was trading at about 65; after the minutes were released and interpreted negatively, HD dropped back with the rest of the Dow to around 63. Then when Bernanke spoke and Home Depot’s results were announced for the previous quarter, it shot back up to 67, over a five percent gain.

If you were a hedge fund manager who missed the January stock rally (like many of them), the chance to buy HD at 63 ahead of earnings was a big deal. A 4-point gain might not sound like much, but if you bought 100,000 shares for $6.3 million and then cashed out less than a week later at more than a five percent gain, you would have netted a $400,000 capital gain – short-term, of course, but that doesn’t matter if you are a hedge fund domiciled for tax purposes in the Cayman Islands (like many of them). That’s a 260 percent annualized return! Not a bad week’s work, all thanks to those helpful “commentators” who read the Fed’s month-old tea leaves as foretelling a policy change that would be highly negative to stocks!

Once and for all, investors need to understand that folks who find reasons mysteriously hidden in Fed minutes to talk down the stock market are no more inherently credible than the folks who find cause to talk it up. And appreciate that some of the Cassandras may be invested in a bet that you will take their doom-saying seriously. Do your own thinking – this one should have been seen as an obvious head-fake. Fool us once, your fault – fool us twice, ours.

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Content originally published on The Huffington Post

There could be several answers to this question, not all of which are contradictory.

Some market participants may believe that one side or the other in the political game of chicken will blink and pull off the road at the last minute (or the minute after the last minute, as happened with the Fiscal cliff drama of New Years Week). It wasn’t the president who blinked then, and so it won’t likely be Obama this time, which leaves it up the House Tea Party Republicans: but they seem to have convinced themselves that the Sequester is the only way to accomplish any kind of budget cut, or that reductions in the rate of spending increases aren’t really “cuts” at all. So they do seem committed to letting the Sequester happen and either blame the president or take credit for the cuts, or both! (Logic never bothers this crowd.)

The two polar opposites on this fight, therefore, seem to be out of the game in terms of any last minute blinking. Why then, could markets expect anything other than a train wreck for the economy already showing signs of recession in the last quarter of negative growth? First of all, the markets don’t really believe the last quarters’ early estimate of GDP — and more recent data, like exports, suggest that the markets may be right in expecting an upward revision in of Q4 GDP to positive territory by the end of this month.

Secondly, the markets hold out some hope that the Senate again (as with the Fiscal Cliff) will yield some sort of last-minute maneuver — perhaps a one-month can-kicking to at least synchronize the Sequester kick-off with the end-of March deadline for a continuing resolution to find the entire U.S. Government through the summer.

Why not, after all, set up another “perfect storm?” Wouldn’t it be just the way Super Storm Sandy taught us: two “lows” colliding over the East Coast to paralyze commerce — in this case, the “low” of Sequester combined with the “low” of a Government shutdown — a veritable wish-fulfillment fantasy of the Tea Party. And they could blame all the resulting economic crash-landing on Obama and go on to a glorious victory this November in the presidential election with… oh, wait a minute, the election was last year! But the market may be right that at least putting these two evil twins on the same timetable would get us through another month of capital gains before the shut hits the fan.

Moreover, a one-month “suspension” of the Sequester would give Senate Republicans a chance to cave without actually caving. Because they wouldn’t be caught voting for further tax increases (like removing the “carried interest” capital gain treatment for private equity, venture capital and hedge fund managers’ performance compensation) — instead they would be just attempting to make time for a broader solution for spending issues (and maybe a little tax reform), just as they did when they agreed to put off the debt ceiling trigger until at least the end of May. Washington usually likes to cloak deals in “precedent” — except when it doesn’t.

If the Senate actually passed a 30-day Sequester punt (ok, the football season is over, we can get away with a bad metaphor), Boehner might be forced to at least let the House vote on it, and if enough non-Tea- Party Republicans joined with Democrats, as they did on the Fiscal Cliff and Debt Ceiling votes, we could defer the latest Armageddon until late March instead of late February.

The markets may also be betting that President Obama, despite his daily reminders of how the Sequester will force drastic cuts to military readiness, air traffic control, airport security personnel, meat and poultry inspection, food stamps, Head Start, childhood and family nutrition, research into infectious diseases, disaster recovery in the Northeast and elsewhere, school lunches, Veterans benefits processing, and the like, will use his executive authority to defer and deflect these draconian measures for, say, 30 days or so, to produce his own version of deferred Armageddon to bring the whole thing to a head in the context of the “government shutdown” debate coming at the end of March.

Indeed, if history (and the ever-cable TV-present Newt Gingrich) are any guide, the thought of having to defend a government shutdown as well as the Sequestration might send shivers up the spine of just enough Republicans to get them to throw the hedge fund managers over the side and make a deal to get through the rest of the year with some form of “Sequester Lite” that won’t trigger a new recession in Q2 and Q3 and that raises just a bit of “loophole closing” tax revenue to create some “balance.” They all know that the “carried interest” tax benefit is indefensible anyway and will go as part of any eventual “tax reform” package; Obama will have enough for his victory, but Republicans will not have to worry about being again labeled the Party (Poopers) of 1995 (actually that may give them more credit for modernity than they deserve lately). And the markets will be happy indeed!

Obama then can move on to approving the Keystone Pipeline while closing a bunch of coal-fired power plants, appointed women as Secretaries of Transportation, Commerce, the EPA, and to head the Federal Reserve after Bernanke, and if he’s still on a roll signing immigration that passes precisely because it doesn’t have his fingerprints on it. (It’s a truism that there is no limit to the things you can accomplish when others get to take the credit!) And maybe there will be controls on gun sale procedures and ammunition limits (but these subjects are for another blog).

Right now, the best thing we have going for the stock market is that nobody in Washington truly wants to take ownership of the Sequester — even the Tea Party will eventually duck this paternity test. The stock markets have seized on such denial of fatherhood with both hands. Little else explains a market up close to all time highs in just the first fifty days of the year. It can’t be about the Pope, could it? But there is one forthcoming election in Italy that could upset the market’s Apple-less applecart – but that’s if Berlusconi wins!

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Content originally published on Yahoo! Finance

While we are on the subject of banning assault rifles and machine-gun ammo clips, it might be good to take a quick second look, not only at the doomsday machine heretofore known as the “Debt Ceiling,” but also at its close relative, the “Sequestration” legislation.

The “Sequester” was the deal concocted in Congress to back its way out of the summer 2011 Debt Ceiling fiasco: to get the Republican radicals to give up their threat to put America into default unless the budget was cut by an mount equal to any Debt Ceiling increase, Congress agreed to $1 trillion in across-the-board cuts to military and discretionary domestic spending (not including most “entitlement” programs) over 10 years, starting with 10 percent of that in the very first year (2013). Thus, there would be no Sequestration but for the manufactured Debt Ceiling crisis.

Self-Inflicted Economic Suicide

Virtually every reputable economist who has studied the U.S. debt situation, including the Federal Reserve chairman, has suggested that the needed trillion dollar budget cuts should be “back-loaded” within the coming 10-year period to avoid putting the brakes on the currently emerging economic recovery from the Great Recession. But never mind. The theory was that by legislating a doomsday machine of cuts that undoubtedly would hurt the economy because of their “front-loading” and their meat-ax nature – butchering the “sacred cows” of both Republicans ( $46 billion from the Pentagon) and Democrats (deep cuts to government services like air traffic control and social programs like food stamps community health clinics) – Congress would be forced to either come to a true Grand Bargain on taxes and entitlements like Medicare, or adopt more targeted and better-timed budget cuts so as not to put the economy back into reverse.

It didn’t quite work out as planned, however. When Ben Affleck, after his success with “Argo,” directs the remake of “Dr. Strangelove,” it probably won’t involve fighting in the “War Room” at all, but rather the self-inflicted economic suicide pill we are about to ingest as a nation or around March 1. Unlike in another film of high irony, we will find that currency suicide isn’t “painless.” (and it won’t be as mordantly funny as “Mash,” either).

Congress Holds the Purse Strings

Like so many train wrecks before, this one we can see coming. It doesn’t have to happen in a sane world. But that is asking a lot of Washington D.C. and specifically the U.S. Congress just now. Just look at the underlying insanity of the Debt Ceiling law, which as noted is the primary cause of the Sequester plan.

Under the Constitution, the Executive Branch spends only what Congress directs it to spend and generates revenue to do so by taxation and fees only to the extent that Congress has authorized it to tax and charge. Obviously, if what the Government is entitled to collect turns out to be less than what it is obliged to pay out, it must borrow the balance to “faithfully execute” the laws of the United States. No President independently runs up the debt. If this President or any other is to be accused of an “addiction to spending,” then by necessity his drug dealers reside at the other end of Pennsylvania Avenue.

Accordingly, any attempt by Congress to purport of impose a “debt ceiling” that would prevent the Executive Branch from paying the obligations of principle and interest of the United States heretofore lawfully incurred (as they all have been) would seem to be unconstitutional on its face as exceeding the legislative powers enumerated in the Constitution.

A Nonsensical Attempt

Nor is it even logical to attempt to impose retrospectively a “ceiling” on the arithmetic consequences of mandates already written into law regarding spending required and taxes allowed. Ordinarily we get notice of our credit card limits before we charge anything, not after the fact. How would that work out in the real lives of you and me?

We wouldn’t do business with a credit card company that imposed a credit limit retroactively – and Congress is trying to do that after mandating the very spending and borrowing it apparently wants to have second thoughts about (or at least “have it both ways”) mandate the spending and then purport to deny accountability and leave the President powerless. But the President is not powerless; he used the “bully pulpit” to dragoon the house Republicans into putting off the Debt Ceiling crisis originally scheduled for January by “suspending” the ceiling a few months to give time to sort out the budget and the looming Sequester time bomb.

Some have suggested that the President should ultimately nullify any such debt ceiling by citing the 14th Amendment’s provision that the “validity of the public debt of the United States, authorized by Law… shall not be questioned.” But validity of debt is one thing, and having the funds to pay it is another. A President asserting the first proposition doesn’t reach the second. And relying on the Supreme Court to affirm the Constitutional nullity of a refusal by Congress to raise a Debt Ceiling already imposed by statute, as is the case now, would take too long to resolve to satisfy the financial markets, not to mention the rating agencies.

Fixing the Problem

What, then, can a President do to sustain the “full faith and credit” of the United States as to its public debt, as well as Social Security payments, veterans benefits, and other financial entitlements under law if Congress refuses later this year to actually raise the Debt Ceiling to a level commensurate with the projected US tax revenue shortfall against Congress’s mandated spending? Fortunately we don’t have to cross that bridge just yet; but the clock compels us to come to grips with the Debt Ceiling’s nefarious progeny — the Sequester –which is an equally poisonous pill for the economy and even our national security.

The Tea Party wing of the Republican Party, reluctant collaborators in the Sequester deal (they actually wanted to get to debt default), has now overtly come out for letting Sequestration happen. In their view, any cut is better than none, and maybe the Democrats will cry uncle first when the economy tanks and the poor cry for their benefits. More traditional Republicans remain more ambivalent, even sharing the Obama Administration’s very real concern for the military cuts, which have already prevented deployment of a second aircraft carrier to the Persian gulf in the midst of critical instability in that region and their own Party’s cries for more U.S. military assets closer to besieged American embassies.

Obama has suggested a short-term fix to leave enough time for a renewed grand bargain over the budget, taxes, entitlements and the Debt Ceiling to come together during the summer – which was the basis of the deal in January to put off the Debt Ceiling issue itself until mid-May at the earliest. But Speaker Boehner got that deal done without Tea Party votes, depending on House Democrats for his majority. The Senate would probably go along with a parallel Sequester “suspension,” but the House Tea Party caucus will not, particularly if any such short term deal includes closing tax loopholes like the indefensible “carried interest” capital gains treatment for hedge fund managers performance compensation. Even Mitt Romney put this on his tax reform list, but now Republicans are back on their familiar “no new taxes” bargaining posture.

Is this really the scenario the Tea Party wants to start their second American Revolution? If so, they should indeed grab their muskets and three-corned hats. Our economy and our national defense structure are going to take on some late 18th-century characteristics in short order if the Congress doesn’t act sanely.

The Speaker of the House must again confront the possibility that any deal to avoid the adverse consequences of Sequestration will be dependent on Democrat votes. At the moment, doing so twice in one calendar quarter is such a galling prospect that he is fiddling with using the “leverage” of severe cutbacks in military readiness and social services – and maybe a total government shutdown by the end of March – to carry out the will of the roughly 20 percent of the American people who support the Tea Party “rule or ruin” philosophy. Time will tell if preserving the “carried interest” tax benefit for private equity and hedge fund executives, and showing the food stamp “takers” who’s boss, are worth an aircraft carrier in the Persian Gulf.

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