Connelly on Commerce

Content originally published on Yahoo! Finance

In each of the past four years, any advances in the U.S. equity market that occurred in the first quarter (as is happening now in 2013) have been more than reversed by deep “corrections” in market values that come on with the fury of a March wind with the onset of spring.

Whether it was the Federal Reserve’s premature (although pre-scheduled) termination of its first round of mortgage buying (restored after a few months and pursued to this day) in 2009, or the onset of the re-emergence of the Greek/Euro financial crisis in 2010, or the opening acts of the US debt ceiling crisis in 2011, or the re-emergence of the Greek crisis, spread to Spain and Italy, in 2012 – the result was always the same: A swoon in stocks in the spring. The old saying, “sell in May and go away” was replaced by, “May’s too late, buddy” as stocks hit lows on their way to summer.

Where the Money Is Being Made

Each year, however, those who bought while the correction bottomed reaped large rewards by autumn as a combination of political fixes in the U.S. and Europe (aka can kicking) and Federal Reserve market interventions pushed and pulled stock prices back up to the point where, in 2012 for instance, the S&P 500 equity index finished up 16% for the year! Needless to say those who bought in the spring trough were up way more than 16% percent for the year.

Fool me once, it’s your fault. Twice, it’s my fault. But four times? Ever feel like the can that got kicked down the road? Do we sense a pattern here?

For the past four years, it has been possible for professional traders to employ various “tools” to manipulate the market down to their advantage – first to generate profits from their “short” positions, and then to buy stocks they have driven down on the cheap side.

First, it was stories planted in the media about how foolish Federal Reserve policy was going to bring on rampant inflation in the U.S. – that hasn’t happened. Then it was the firm conviction of commentators that Greece was going to have a messy default and leave the euro (these still continue, although Greece is still there), or that Germany would leave the euro (still there), or that the euro currency itself would drop to parity or worse against the U.S. dollar, or even collapse totally (it’s still there, trading well above parity).

As it happens, the Financial Times of London has just reported that a net $100 billion in private investment has poured back into the wounded periphery economies of the Eurozone in the past year – equal to a nine percent boost to the economies of Greece, Spain, Portugal, Ireland and Italy. All is not yet fixed in Europe, and there is much hard political work to do, but Armageddon has slipped off the horizon.

Then there were the firm predictions that the U.S. would default on its debts, or that we would go over the “fiscal cliff” – we didn’t. In 2012, “analysts” firmly asserted that S&P earnings would be down in each fiscal quarter of the year – they were up in every quarter. Most recently, the same “experts” predicted that revenues would be down for the last quarter of 2012 – but thus far, 65% of the companies reporting show revenues up!

And then there is Apple (AAPL). one commentator went so far as to opine that Apple was now a broken company (just days after the company reported the largest revenue ever reported in one quarter by a technology company). One can argue about Apple’s competitive challenges and supply chain hiccups, but to call it a broken company is hyperbolic in the extreme.

But bear in mind that a bear run on Apple benefits many market players – especially the investment banks that sold one-year high yield notes to investors that repay them not in dollars but in shares of Apple. If Apple’s price has declined significantly from the issue date of these notes (which have a face value equal to the price of Apple stock on the notes’ issuance date) then the banks make a lot of money on the deal. A note priced at Apple’s former price of $700, even at 8% monthly, would pay out $56 in interest. But if Apple’s shares stay at $450 until these notes mature in just a few months, the issuing banks will pay back $250 less than they borrowed – a 35% profit!

It’s About Perspective

This little example just goes to show that it’s important in this market to recognize that not all the naysayers and analysts are disinterested observers. Facts are stubborn things, but they can get drowned out in the torrent of negative sentiment, especially among ordinary investors who do not routinely “short” stocks either directly via derivatives and option positions, and thus don’t realize that market Cassandra’s or no more credible than Pollyanna’s.

Market manipulation downward has thrived in an environment where pessimism has becomes fashionable. Market seers who kissed the mortgage meltdown try to win book contracts by predicting the next “black swan” event – but when everyone sees black swans on the horizon, they’re no longer rare – or credible.

Pay Attention to the Data

Despite the emerging good news on the U.S. economy – significant housing recovery (prices up 5.5% in November, the biggest jump in five years), continued low inflation, steady reductions in weekly unemployment claims, cash-flush corporations, solid bank earnings, increased business lending – there are many hedge funds who bet short on the market for the start of this year, and now have a bad case of performance anxiety.

Investors should remember that there are two cures for this hedge-fund ailment: playing catch-up to the market (which can get expensive) or try to “talk the market down” to their level. The latter tactic worked rather well for the past four spring seasons, and even again early last autumn. It will pay a lot of dividends in the coming weeks to pay more attention to data and facts than reports of black swan sightings.

Many good reasons may emerge in the coming weeks – government shutdown, sequester debates, Mideast unrest, oil prices, Italian politics – that would warrant a stock market correction as we leave winter behind. But none of these events necessarily means a new Armageddon. And the fact that the market tanked in spring each of the past four years does not prove “Chicken Little” is finally right this time, after four years of being … well, wrong!

Filed under: Uncategorized

Content originally published on The Huffington Post

Here’s a user’s manual on the latest effort to bend the Constitution to rig the next presidential election, and the next and the next, for that matter.

Step 1: Start with an effort to make sure that you win every state legislature you can for your political party — either Democrat or Republican; it doesn’t matter. Democrats have toyed with this idea in the past after they lost the White House; Republicans are doing so now, only with more purpose and drive (and Super PAC money, which goes a very long way at the state legislative district level).

Step 2: Be sure to win and hold this legislative majority in the year or so immediately following the national census. Population shifts among the states generate specific opportunities for your legislators to redraw the U.S. congressional districts in ways that stack the deck in favor of your party by good old fashioned American gerrymandering, while some states have set up non-partisan commissions to redraw district lines fairly and independent of party favoritism, most still keep this juicy perk the hands of Statehouse politicians.

Step 3: Draw the district lines to be sure your party will win a clear majority of congressional districts in your state, leaving your opponents with a only rump minority of winnable seats.

Step 4: Next, use your party’s state legislative majority to vote in a change in how your state’s Electoral College votes will be cast in the presidential election, switching from the prevailing “winner-take-all” allocation to a more radical version of the rules now in place only in Maine and Nebraska that awards one of its electors votes to the candidate that wins each congressional district, and awards the states remaining two votes — constitutionally representing its number of senators — to the candidate that wins the most congressional districts in the state (Maine and Nebraska still award these two votes automatically to the statewide winner).

Step 5: Claim that this change is all about making the votes in each congressional district count equally (or something like that, anyway).

What this plan is really all about, however, is to make virtually certain that the candidate that wins the majority of the national vote, and the majority of the state-by-state popular vote, nonetheless is not only not guaranteed to win the presidency, but is in fact most likely to lose. Winner-takes-all becomes loser-takes-all.

For example, if this new system of electoral vote counting had been in effect in 2012, Barack Obama’s four percent, four-million vote majority nationally, and his win of a states with over a 100-vote majority in the Electoral College, would have become a narrow electoral vote loss to Mitt Romney. This reality certainly narrows the appeal of the argument that this new plan is the best way to reflect the “will of the people.”

Lest there be any doubt that the goal of this new electoral college distribution plan is intended to reverse the results away from a popular majority outcome, bear in mind that the states where the incumbent Republican Statehouse leadership represent a majority of the so-called “swing states” in the last election: proposals to shift to the system outlined above have been brought forward by GOP leaders in Virginia, Ohio, Pennsylvania and Michigan — can New Florida be far behind? The Chair of the Republican National Committee has put his weight behind the project. While no doubt Republican leaders would not want to entertain such changes in their “winner-take-all” states like Texas, the Chair of the Republican National Committee has put his weight behind this effort to turn enough swing states into “Red” states to make the national candidate more competitive in the Electoral College regardless of the popular vote spread.

There would seem to be no stopping this movement constitutionally, since that document — while it specifically dictates how many electoral votes each state will have — nonetheless leaves the control of electoral votes to the states: In the abstract, a state could allocate all its votes to the loser of its popular vote, or to Santa Claus, if the voters would put up with that.

Indeed, some states (after the Bush v. Gore decision awarded the presidency to the popular vote loser) have enacted proposals to award their entire electoral vote to the national popular vote winner regardless of who won that particular state, so long as states with a majority of electoral votes states agree likewise. But the impetus for that particular end-run around the Electoral College system has lost its momentum on the Democratic side after two consecutive and aligned popular and electoral majorities for Obama.

Only public outcry can stop the momentum in swing states now held by Republican majorities from proceeding with the shift of their Electoral College vote to a system driven exclusively by the votes per Congressional district, which have already been gerrymandered to deliver a Republican majority. Such an outcry might be based on a better appreciation of what the Constitution may well infer about the distribution of electoral votes, even if it does not expressly provide a resolution.

Ironically, the practical limits in the existing political landscape (e.g., the Texas situation noted above) means the most pernicious result of the present move to change the College might be to deny any candidate an electoral majority, strengthening the clout of marginal third party candidates who might pick up just enough Congressional districts to control the College outcome with hard bargaining, or cause an electoral deadlock.

When no candidate receives a majority of electoral votes, the Twelfth Amendment to the Constitution revised the electoral process to provide that the presidency would be determined by the newly-elected House of Representatives — which might on its face suggest that choosing electors on the basis of Congressional districts might be an acceptable approach constitutionally after all.

But the Amendment goes on to provide that in voting for the president, the Representatives must in effect pool their votes by state, with each state having only one vote — that is, a “winner take-all” system, state-by-state, just as 48 of the 50 states now provide for their won Electoral College votes!

Surely this means that the recent move to change the traditional Electoral College vote allocations is far out of step with the logic and spirit, and even the most relevant literal provisions, of the Constitution, and should be resisted — not only by liberals and Democrats whose hoped-for emerging presidential majorities might be threatened, but also but by all those Republicans who proudly assert their conservative values, which indeed are well-grounded in a Constitution whose authors were more than familiar with the Burkian philosophy of limited government insured by its unquestioned legitimacy.

Filed under: Uncategorized

Content originally published on The Huffington Post

We learned over New Years that certain Republicans have a very hard time saying yes, and certain Democrats have a very hard time accepting wins!

Let’s just say this: A deal that removed permanently the threat of an Alternative Minimum Tax springing on unsuspecting middle class households; that embedded the tax on estates of more than $5 million at a 40 percent rate (up from 35 percent); that preserved long-term Federal unemployment relief for all of 2013; that permanently raised taxes on household income over $450,000 while permanently freezing rates on those below $250,000 and limiting some exemptions and deductions for those at $250,000 and above; that raised taxes on dividends and capital gains by 5 percent while leaving in place additional levies on dividends to help pay for ObamaCare — all with absolutely no price paid in terms of additional cuts in social programs or reduced entitlements — should on the whole be considered a great victory for Democratic Party principles. Yet the whiners like Paul Krugman (who again seems to be out of the running for a Cabinet post) keep trying to increase Obama’s unfavorable ratings among his own party by complaining that we didn’t get the perfect result.

Liberals like Krugman (who has written with distinction on the economic contradictions and idiocies of the Far Right) need to adapt to the reality of governing as distinct from the role of opposition party: you need to be able count (votes) as well as to choose (compromise). The latter-day Clinton admirers seem to forget Bill’s maxim – don’t let the perfect become the enemy of the good! Grow up, liberals, and learn to live with the hard task of power, or you’ll lose it to the yahoos you so abhor by 2016.

As for those Yahoos (formerly known as the Republican Party), let’s look what they got: the temporary Bush Tax Cuts finally made permanent for 98 percent of individuals and 97 percent of small businesses; no additional stimulus spending; preservation of Congressional leverage via the debt ceiling; a two-month trigger left ticking on the “sequestration” aspects of the Fiscal Cliff that badly hurts Democratic program priorities as well as military spending; a 50 percent reduction in Obama’s tax revenue increase target, plus the $200 increase in his benchmark for the highest marginal tax rates on families; a permanent settlement of the estate Tax cut-off at $5 million with only a modest increase in the rate, both more advantageous than when Bush II took office; elimination of the Obama payroll tax cut for employees; and permanently limiting the reach indexing the MTM to inflation — all while keeping in place all the special tax “loopholes” for carried interest, and corporate jets, and oil companies, not to mention charitable, mortgage and state tax deductions — what’s not to like for a good Republican here? And yet they sulk and weep and vote “no” in droves. Hang around evangelicals and you get a taste for purity, I suppose.

It would seem that both parties should sober up and approach the next phase of the fiscal and budgetary debate with a clearer view of their own priorities, at least to exclude from those lists the necessity to make the other side say “uncle” in a publicly humiliating manner. For a president who “open-mic”-ed his prospects for more “flexibility” once re-elected, he should stop running for re-election finally and use that flexibility to suggest a responsible path to entitlement preservation reforms: the general public, if not the Democrat Far Left, is ready to hear it. But only after Republicans take the debt-ceiling default scenario off the table.

Republicans have more than enough leverage in terms of the sequester trigger and the government funding “shutdown” option in March to win some concessions from the Democrats. But they in turn should understand that their ante on the table must be more than a package of “poison pills” regarding social welfare spending and resistance to tax deduction reforms — after all, they themselves proposed capping deduction for the rich just a few weeks ago. Surely what was possible before Christmas has not been made irrelevant by a “Cliff” deal that delivered on a lot of their tax-related priorities.

It seems odd in the end — and maybe a reflection of a political and economic society (apart from out here in Silicon Valley) that has fallen in love with chronic pessimism as the new “in” disease — that political leaders have so taken to promoting their losses more than their victories. Has the culture of “retching across the aisle” introduced by the Tea Party so infected everyone else that they simply can’t abide the idea of a “win-win” result?

And by all means let’s agree on corporate tax reform. Democrats and Republicans: recognize that our nominal corporate tax rate is the highest in the world, but nobody pays it because of all the deductions and exceptions. Those on the Left should relax their reflexive opposition to “repatriation” of the trillions in overseas earnings now held offshore to maximize “shareholder value” (a duty under state corporation law) by avoiding a U.S. tax bill as allowed by law ). You can’t count a repatriation deal as a tax cut because those taxes will never be paid anyway under current law. But those on the Right must recognize that any deal must both have teeth to prevent abuse of the repatriation privilege — if only to keep the playing field level for those US corporations (like utilities) that mainly just do business here and thus don’t enjoy the tax -deferral privileges of multinationals like Cisco and Apple. It’s possible to have “win-win” corporate tax reform, too — if only the extremes of both Parties weren’t so in love with preserving their self-portraits as losers (in need of donations, of course)!

Filed under: Uncategorized

Content originally published on Yahoo! Finance

Apparently, it didn’t stand for “Christmas” either; maybe we should just leave it as “C” for “Cliff.” Whether or not we “go over” the Cliff on January 1, 2013 is now anybody’s guess, but probably in the long run it doesn’t matter as much as whether we bungee-jump back to fiscal sanity of sorts some time before the State of the Union address by President Obama in late January.

Indeed, the “Bungee Bounce” is most probably the new “Plan B.”

Plan B Falls Flat

It was hard to know what the old Plan B really stood for. Maybe, given his surname, the Speaker just liked the sound of the letter “B.”

Billed as a plan to preserve the Bush Tax Cuts for everyone but those making a million dollars a year, the Plan in fact reduced those folks taxes, too, by keeping the marginal rate on their earnings below a million dollars at the Bush levels. Boehner defended the Plan, against the objections of Tea Party and Club for Growth purists, as not really being a tax increase on millionaires because their taxes were already scheduled to go up under the Fiscal Cliff scenario.

But he seemed to miss the irony that the same could be said for President Obama’s plan, which Boehner of course opposed on principle. And the original Plan B did nothing to avert the sequestration of military spending or to mandate the more aggressive spending cuts they said Obama’s plan lacked.

It’s in the Senate’s Hands Now

The demise of Plan B for lack of support in the Speaker’s own caucus, however, did have a major consequence: it left President Obama without a partner for any “Grand Bargain”; it cemented the band of House Republicans as unwilling to raise taxes even on millionaires (at least without deep cuts in the social safety net for everybody else); and it brought the Senate back into play in how this all gets resolved.

The last point may prove significant for two reasons: (1) under the Constitution tax-related legislation is supposed to originate in the House, but the House has abdicated for the moment; and (2) that in turn raises the specter of Tea Party Republicans in the new House of Representatives who feel backed into a corner resorting again to the nuclear weapon of debt ceiling defaults to extort a tax cut for everyone, not just the “middle class” once the Fiscal Cliff hits. Although the President, with strong Big Business backing, says this time he won’t “play that game,” he may have to in the end if no deal is reached before New Year’s Eve to avert the Cliff tax increases on couples earning less than $250,000.

A Grand Bargain Is Still Possible

There is no point at this stage in hashing out the details of what the Fiscal Cliff is – even my middle school daughter (who rudely calls it the “physical cliff” to put it in the same disfavored category as her PE class) knows what the Cliff entails. The big point now is what it ISN’T – which is to say, it is not “immediate.” Lawmakers have a few weeks before the new “W-2” deductions reflect both the expiration of the Bush income tax cuts and the Obama payroll tax cuts for employees. And the Administration can possibly defer the sequestration of military spending sequestration using the President’s war powers, and Treasury can squeeze out a few more weeks until the death ceiling hits. But, as the saying goes, life’s only certainties are death and taxes, and this year-end, death remains certain and so does the expiration of the current Estate Tax cuts.

The outlines of a Grand Bargain remain fairly clear and essentially only a few hundred billion apart in outcomes favored by the two sides” – but the fact is there are really three sides – Republicans who want a reasonable deal from their point of view; Democrats who share the same goal with different numbers; and the Tea Party Republicans who live in an alternate universe of denial. The hope is that universe will finally be shattered by the effect of the Bush Tax Cuts really going up on January 1 so that they can be cajoled into voting for a tax CUT for everybody (even a little one for millionaires that Obama will give once the Bush Cuts are gone). But alternative realities die hard, and even a Grover Norquist blessing may not persuade the Tea Party to go along when Rush Limbaugh – who has succeeded thus far in urging them to let the Cliff happen so Obama owns it – tells them in January to just say “no” again.

Many observers believe that the current breakdown in negotiations is really all about another re-election—this time Speaker Boehner’s. But he really has no opposition in his Republican caucus, and they are not going to vote for Nancy Pelosi when the new House convenes on January 3. If the Fiscal Cliff crisis continues until then because not even a stop-gap deal is reached by New Years Day, it will remain whether the re-elected speaker is really John Boehner, or Rush Limbaugh.

Can Republicans Get Their House in Order?

Here, then, is the most important question in the whole Fiscal Cliff crisis right now. Will Boehner face down Limbaugh and allow a vote on a grand tax-cutting, spending-cutting, unemployment-benefits-extending, military-saving, ATM-fixing, entitlements-reform-promising, corporate-tax-reform outlining, estate-tax-compromising and debt-ceiling-deferring bargain that will pass the House with only a small minority of Republican votes? Will there be a Bungee Bounce off the Fiscal Cliff?

We should get a first clue to the answer by whether he will even do a small part of that before January 1? If the answer is still the Limbaugh “no,” he will hand the country a recession, and the President a once-in-a-generation opportunity to burn the Tea Party brand forever into the Republican hide in his State of the Union address. And then we will see if Rush Limbaugh (or Wayne LaPierre) is also the real President of the United States as well as Speaker of the House.

Filed under: Uncategorized

Content originally published on The Huffington Post

The late comedian George Gobel had a rueful line that neatly described the painful realization of being out-of-place, out-of-step, or just plain on the wrong side history precisely when history is being made: “I feel like the whole world’s a tuxedo, and I’m a pair of brown shoes!” More than a few political leaders and pundits had inklings of that feeling in the days following the recent election, but those first twinges are nothing compared with the overwhelming change in national mood after Newtown’s Black Friday.

When 20 first-graders and six of their teachers are gunned down days before Christmas by a disturbed individual with unfettered access to an assault rifle and enough ammunition to have literally killed the whole school — had one hidden person not called 911, the days of unfettered political obedience to the NRA are numbered. Just look at the data on the rash of gun purchases in the days immediately after this massacre: Those who have relied on the NRA to rule the roost know they can’t count on it anymore and want to shop now before the music stops.

They see a reelected President Obama asserting that enough is enough — having a moment similar to President Kennedy’s historic conversion to civil rights champion as he sensed the shift in national mood when Bull Conner and his ilk became nightly horror shows on Huntley-Brinkley and Walter Cronkite. And the country followed (presidents matter); and he brought with him a son of the South, Lyndon Johnson. Just this past Monday, we heard the NRA member Joe Manchin, Senator from West Virginia, open the door to dialogue with rural America about how we can have reasonable regulation of gun and ammo access without violating the Second Amendment. And Senator Schumer of New York tells his fellow liberals they have to start their dialogue by accepting the reality of the constitutional right to bear arms.

Is compromise no longer a dirty word politically? Maybe so. The president himself often referred to the hyper-partisan “fever” that gripped the body politic beginning in the poisonous debate over “public options” and phantom “death panels” under what became Obamacare — and this in turn leading to the triumph of “take-no-prisoners” talk-radio politics with the Tea Party in 2010, the debt ceiling debacle in 2011, and the “take-it-to-the election” 2012 filibusters and gridlock that reduced Congress to fulminating impotence.

The election did not cure this fever as Obama hoped, but merely stabilized it. But an act of crazed killing appears to have broken the fever at last, at least for a while, and created a window to get us off the precipice and get common sense things done for the common good. Shame on us for needing such tragedy to come to our senses, but seize the opportunity nevertheless.

Look not only at the new openness to discuss assault weapons again, along with ammunition clip restrictions, gun-purchase waiting periods for checking national data-bases, and enhanced intervention options for treating psychologically-disturbed individuals, on the one hand, and considerations of improved physical security and even police patrols to protect our primary and secondary schools just as we do in our colleges. Taboos are breaking down from the center out. Extreme positions on both sides of the political spectrum are being marginalized by public opinion and even by the cable media choking on its own bias toward promoting “controversy.” (When even Rupert Murdoch tweets out against assault weapons, you know something big is happening.)

It’s no coincidence and not merely a shortening calendar that led both Speaker Boehner and President Obama to put serious “offers-in-compromise” on the table in their fiscal cliff negotiations in the days immediately following the tragedy in Newtown. Both of these successful politicians understand that Americans see Newtown as Anytown USA, and will not stand for continued brinksmanship from political leaders, or their followers, in the wake of such an aching, manmade tragedy. This disaster was not an act of vicious nature like Katrina or Sandy; unlike global warming, there is not even a remotely debatable case as to whether the Newtown murders were caused by human action. In these circumstances, patience wears thin for officials who say “the voters made me do it.” We are beginning to want to try some solutions instead of the constant fights cable TV wants to cover. (While CNBC asks Washington to “Rise Above” the fights, it continues to give its own hyper-partisans like Rick Santelli and Gary Kaminsky plenty of airtime to carry on the battles.)

Enough is enough, it seems, in more ways than one. There is now a real chance that the fiscal cliff can be avoided and actual tax and immigration reform can be addressed; and that a national debate can start on sensible steps to diminish the prevalence violence in our culture. This blogger is off for the holidays to Australia — a country that banned assault weapons and enacted other steps to reduce the personal “arms race” over a decade ago after a mass killing, and has not experienced even one such event since. Don’t let anyone tell you it can’t work.

Filed under: Uncategorized

Content originally published on The Huffington Post

We know politics sometimes makes strange bedfellows. But the emerging alliance between the most liberal wing of the Democratic Party led by New York Timescolumnist Paul Krugman (and lately David Korn, the “47 percent video” man of Mother Jones) and today’s Wall Street heirs of The Bonfire of the Vanities‘ Sherman McCoy would make a fair number of evangelicals blush.

Krugman and Korn have been pushing the line that President Obama not only should settle for nothing less than total victory in his fight to allow the Bush tax cuts for the wealthiest Americans expire on New Year’s Eve — even if the Republicans don’t budge and we go over the fiscal cliff — but that he actually is likely to do so. The result: an immediate tax increase on all income levels and severe across-the-board cuts in military and discretionary spending that would compromise both national security and the social safety net — would in their belief be short-lived (and seen by the financial markets as temporary) because the new Congress, still with Republicans in charge of the House but with a diminished majority, would quickly cave-in and give back the Bush tax cuts to Obama’s “98 percenters” since their votes would no longer violate the Norquist anti-tax pledge.

Essentially, Krugman, Korn and other progressives argue that it is time for Obama to definitively assert that he was elected president and that Norquist wasn’t elected to anything, and that John Boehner is speaker of the House, not of the United States — second in line to the presidency, but not some sort of co-president.

There is clearly substantial merit in this analysis. Presidents can’t bluff, and to quote the great political analyst Bob Dylan, even the speaker “can’t win with a losing hand.” The president during his first term tried to anticipate and incorporate established Republican ideas in his stimulus and healthcare legislation, and all it got him was the Tea Party, so a strategic change was surely in order after his decisive, four million vote election victory (bigger than Bush’s in 2004, when the Wall Street Journal intoned that he had won an historic mandate).

Krugman and Korn assert (with some polling evidence to back them up) that Boehner and the Republicans, and not Obama, would bear the blame for going over the cliff). But polls, as we learned just last month, can be distorted by one’s own rose-colored glasses. And there is usually a lot of blame to go around when the stock market crashes.

But K & K also dismiss the risks to the president — and the economy — from any stock market crash as it did in 2008 when Congress initially failed to pass the TARP legislation intended to prevent the worst case scenario from the “financial cliff’ of a global credit collapse, and as it did in 2010 when the debt ceiling issue was taken to the brink and the U.S. lost its AAA credit rating precisely due to political gridlock.

They apparently believe that either a) the equity market — even faced with arithmetic certainty of recession if we do fall off the cliff and stay there — will not react as before because it trusts the GOP will cave, or b) even a stock market crash is better than a compromise where Obama “sells out” his base on taxes and entitlements.

Krugman and Korn may not realize, despite their deep knowledge of economics and the political blogosphere, that quite a few middle-class Americans care about their 401(k)s and their mutual funds’ performance. Neither of these gentlemen has a conspicuous record as a market analyst or a stock-picker. And given their own started views that the Republican/Tea Party caucus is fundamentally irrational, why on earth would Krugman and Korn expect them to cave in January over a recession they believe (along with Rush Limbaugh) can and will be blamed on the president, and that they have always been willing to risk as far back as the debt ceiling debacle when they almost brought one on? And why would they believe the stock market would believe that, either?

The inevitable “cliff hanger” market crash is not a “bump in the road” — to borrow a better metaphor from the President himself, it’s more like driving the car into yet another ditch, and a muddy ditch at that.

The only winners when the equity market crashes are usually the bond traders who are long in their market just as the panic “flight to safety” in U.S. Treasury securities begins. Then Krugman and Korn are really on Sherman McCoy’s turf. He made millions out of nickels — billions of nickels. And even with bond prices at historical lows thanks to the Federal Reserve, you can bet the house on a rocket of a rally in bond prices if we go over the cliff with a stock market crash at year-end.

On that level, it seems only fair to conclude that the sole rational basis for the Krugman and Korn view of what the president ought to do is that they have applied for positions in the entering fixed-income training class at Goldman Sachs.

This not to say that the Republicans aren’t being even more hard-headed than they accuse Obama of being — their latest proposals calls for giving the top two percent an even bigger tax cut than Bush provided, and they have been totally unspecific as to which deductions that would cut back — mortgage deductions, charitable deductions, state and local taxes, medical expenses, education costs, unreimbursed business expenses? (Take that, small business!) Brinksmanship is a two-way street on a one-lane road.

The view here is not that Obama should cave — just that he should not take the view that a deal doesn’t really matter to real people who don’t enjoy the luxury of Krugman and Korn’s employment. Business will remotely begin to hire in a political wasteland after market crash: on the contrary, it will fire and fire again, because even more than politicians, business is into surviving.

Obama must take pains to expose the Tea Party and the Limbaughs and the Norquists as the ones who don’t care about a recession or a stock market crash. They are the real Sherman McCoys. They will trade a crash for what its worth to their cause. He should make them an offer, soon, that keeps his principles but is apparently one they can’t refuse, precisely because it is in their nature to do just that — refuse, right in front of the American people. The market will wobble; but then, and only then, can cooler heads prevail. All this should happen well before Christmas, however, not after all hell breaks loose on January 1. Hell hath no fury like a stock market scorned.

Filed under: Uncategorized

Content originally published on The Huffington Post

There is a shorthand phrase in media circles for the case where a moderately successful TV show finally wears out its core plot concept and, in an effort to reboot its ratings, takes things to such a preposterous extreme that instead it loses all credibility (and viewers). It’s called “jumping the shark” after an episode that involved just such a scene in a vain attempt to recapture relevance.

It is not unusual to see the same phenomenon at work in the weeks leading up to and then immediately following an electoral defeat, especially one that’s unexpected by its champions. And when you add in the Petraeus drama, “He’s My General…No, He’s My General” script, one can see that shark jumping threatens to become an Olympic sport. But the good news is that once it gets to that stage, we’ve got a reasonable chance that the whole show will be cancelled in due course due to low ratings.

The games really began just before the Republican Convention, when Rush Limbaugh revealed his suspicions that the U.S. Weather Bureau had faked the range of paths of an approaching hurricane to put the Tampa Convention site within the storm’s “cone of uncertainty” and thus scare the party into knocking a day off the schedule (which they did). Of course, while the worst weather did veer farther to the west, Tampa had a pretty bad day and night and the Convention went on to conclusion without incident (or much excitement).

Then came the renewed Trump allegations about the President Obama’s birthplace, with The Donald posting a $5 million charitable gift award to the president if he would just provide his school applications so we could all see where the president said he was born when he left high school. All this did was add the academic admissions offices of several universities around 1980 to the original conspiracy to falsify Obama’s birth announcement back in 1961 by a broad and generally unrelated collection of doctors, nurses, State of Hawaii officials, various family members, at least two newspapers and various other individuals in Asia, America and Kenya, all to make sure the newborn with the Muslim name would be eligible for the U.S. presidency nearly five decades later. (Now we know what the phrase “trumped up” is intended to mean!)

The debates produced a few new conspiracy theories involving the debate moderators: one that Jim Lehrer slept through his assignment and allowed Romney to run roughshod over the president; another that Martha Radatz had some nerve to bet at least as well prepared and knowledgeable as Biden, and especially Ryan, who could not quite get away with his Randian turns on the Truth; and finally that Candy Crowley was a secret member of team Obama when she backed up the president’s transcript quote about “acts of terror” the day after Benghazi. And yet the media and the moderators survived the debates better than the candidates.

Then just before Ohio started its early voting came the Romney commercial claiming a conspiracy among the Italians and the unions to ship Jeep production from that fair state to Red China (where it had been going in before anyway, and despite the fact that Chrysler was in fact ramping up Jeep production in Ohio). When everyone concerned with Jeep denied the allegations, the campaign responded “that’s our story and we’re sticking to it”… and lost the state by 2 percent.

And of course it all came to a final head with RushBaugh again, with his allegation of a vast conspiracy of election polling firms who were systematically over-sampling the projected democratic turnout in an effort to discourage and thus “suppress” the Republican vote (except, of course, for the one or two pollsters that showed Romney winning and the Republicans even in turnout). This charge of course proved to be at worst a conspiracy of correctness, as the election actually turned out pretty close to the polls Limbaugh trashed.

Limbaugh’s fellow theorist, Karl Rove, nonetheless picked up the “voter suppression” charge a couple of days after he also called out — on live TV — a conspiracy of networks, including his own Fox, to prematurely call the election of Obama and thus suppress the conclusion of vote counting in Ohio. Fox, of course, denied that it had itself “jumped the shark” into Team Obama: now that would have been real news!

Limbaugh has also fanned the flames of conspiracy involving the State Department, the FBI, the CIA and the White House and the UN ambassador to suppress the truth about the terrorist roots of the assault on our mission in Benghazi. The conjoined senatorial twins McCain and Graham (conspicuously not joined by their third twin Sen. Lieberman) jumped on the pile.

Others like Charles Krauthammer piled on with allegations that Obama had used the FBI’s affair investigation to hold Petraeus to the company line on Benghazi until after the election — a conspiracy that strangely would have to take form earlier in the summer, even before Benghazi occurred.

Now it turns out that intelligence officials did edit out classified suspicions about specific terrorist groupings and associations from Ambassador Rice’s TV script to safeguard CIA and FBI efforts to trace the actual bad guys. (They also thought there was no real difference between the words “extremist,” which they did allow to be used, and “terrorist.”)

There are important investigations underway regarding Benghazi that will get to the truly important issues as to why our mission was so unprepared and unprotected in the critical days and hours, but these seem not to involve conspiracies apart from incompetence and highly theoretical and bureaucratized approaches to sensitive issues in the field that require far more pragmatic and high-level judgments.

Now two weeks after the election we hear from Romney and Limbaugh both allege a vast conspiracy of “takers” who voted fro Obama because of the “free” goodies the president delivered — a reflection of the 47 percent conspiracy the Romney had alleged earlier of the non-taxpayer beneficiaries of “government handouts” — presumably the Social Security benefits those “takers” had actually paid for, and the veterans benefits and tax-free income our military actually earned by their service, or the food stamps and school lunches and earned income tax credits that hundreds of Republican politicians have voted for (one supposes as fellow conspirators).

Never mind that the alleged non-taxpayers actually have been paying payroll, sales and gasoline and other excise taxes all along. And never mind that women were never demanding “free” birth control; they simply wanted to be able to buy (or earn at their workplace) insurance policies that provide such prescriptions without co-pays. Strange how the free-market folks confuse buying something with getting it free. But facts never stand in the way of a self-serving conspiracy theory.

Maybe the best way to sum this all up is that the utter failure (not to mention the sheer fantasy) of these conspiracy theories to hold true (or even hold water) may finally be leading to a little less credibility for their proponents, or a little less media attention from their cable TV megaphones. Or maybe we should just start countering with conspiracies from the other side — did you know that the owner of Rush Limbaugh’s radio broadcast EIB network is… Bain?!

Filed under: Uncategorized

Content originally published on Yahoo! Finance

Back in the day when he served as the unofficial Cajun spokesman for the Clinton administration, James Carville followed up his dictum about the primordial political importance of the economy with the observation that, given a second life, he would come back as the bond market because then everyone would dance to his tune.

Given a second chance to comment on today’s world order, he would likely choose instead to return as the stock market.

Bonds Are Old News

During the Age of Clinton (Wm. J.), Rubin, Gramm and Rudman, the financial world and most of the rest of us did focus intensely on the permutations of U.S. government bond prices to show which way the political winds would have to blow. This was the case whether it was about the Mexican peso crisis or the Long Term Capital Management collapse, or the debates about the Clinton “stimulus package” or tax increases, or whether Greenspan would get the third term Clinton could only dream about.

We had been conditioned in the Age of Henry Kaufman’s reign at Salomon Brothers and Tom Wolfe’s take on the Masters of the Universe to appreciate the utter centrality of the current price and (inversely, of course, yield) on “Guvvies” to the future of mankind — especially that segment of mankind that lived quite well off dependable interest payment on massive bond holdings (today we call those folks “job creators”), or who were just beginnings to create all sorts of new ways to speculate in debt instruments and “derivatives” thereof (today we call them “plea bargainers”).

If the bond market “vigilantes,” stirred up by some sort of public or private financial profligacy to play havoc with yield spreads, were somehow persuaded by the Fed or the Congress or the President and his Treasury Secretary that all would be made right for bond traders, then we could all go about our business with normalized and predictable interest rates — Paul Volcker’s in his heaven, and all’s right with the world.

After the Fall

But then the bond markets, especially their exotic “derivative” forms like credit default swaps and collateralized mortgage debt obligations, got heady with their absolute power and, as Lord Acton suggests, wound up corrupting the whole global financial system, not to mention the U.S. housing market. The weather vane became the hurricane. And since financial markets are essentially a confidence game, where were we to turn when the “Masters” turned out to be the “Bastards” of the Universe?

Of course, the bond markets took the stocks markets of the world right down with them. But when the Fed intervened to cut interest rates effectively to zero to induce at least a weak spark of risk appetite into the Body Financial to buy time and “juice” for the long slog of economic recovery, a funny thing happened to the bond market — it became stunningly irrelevant to folks making political and economic decisions.

Stocks Take Over

With the Fed putting an artificial permanent “buy” order into the market, bond market prices became “distorted” in the view of traders and thus not a true guide to financial market opinion. The Masters had anything to tell us. Instead, all the commentators eyes, ears and noses to the grindstone focused instead on the bond markets wayward cousin, the stock market, to find the way “forward” to what passes for financial rectitude.

The change started back in the Fall of 2008, when the TARP legislation to save the banks and help spare the U.S. a second Depression was first decisively and even somewhat “bi-partisanly” rejected, and the stock market promptly lost about 700 points the same afternoon. Just a few days later, after the Treasury secretary literally genuflected to Speaker Pelosi, TARP was passed and the market moved back to a somewhat more sedate trading range.

After the Obama Stimulus then passed on partisan lines and Obama directly began to talk up the stock market, the Fed got the idea that perhaps its first round of “quantitative easing” in the bond markets could come to its scheduled springtime end. But quick as you can say “Ben Bernanke,” just like that the stock market swooned to what turned out to be the lowest levels of Obama’s first term, and by the summer the Fed had not only resumed its first QE but also was getting ready to double down with QE II, which sparked the second of what turned out to be several “QE Rallies” in stock prices over the ensuing three years, including the one just before Obama’s re-election that followed the Fed’s announcement of “QE Infinity.” When it comes to getting stocks to move in the right direction, who needs a great convention speech compared with a timely set of Fed Minutes?

No End in Sight?

But the stock market has its own vigilantes now, in the form of hedge fund and other quick action traders who know that a “healthy” stock market “correction” can be very good for them, especially when it has a happy ending — for them, at least. And the famous New Year’s “fiscal cliff” doomsday machine that Congress built for itself (and the rest of us) as a sort of shock therapy for its bipolar budget disorder provides just the meal ticket these equity mavens need to both scare the pants off the politicians and set themselves up for some nice gains when the fear of an equity market crash gets into the Washington psyche.

Of special interest is the automatic tax trigger that raises the tax on stock dividends from 15 percent to nearly 43 percent for the highest tax bracket, including more than a few Wall Street traders. Dividends have been a relatively “safe” replacement for bond interest income for many market participants, and the threat for more than doubling the tax to a level equal to the government’s take on interest payments sent a palpable shudder through the financial community. The stock market went down 500 points in the two days following Obama’s re-election, and was down 1000 points since it pre-election highs until the recent rally sparked by hints of compromise from both the Administration and Congress over tax rate increases.

80 percent of the S&P 500 stocks pay some form of dividend. If you want to see which way the wind is blowing as to the fiscal cliff negotiations, just watch the price of highest-paying dividend stocks.

Filed under: Uncategorized

Content originally published on Yahoo! Finance

There is a moment in every Road Runner cartoon when Wiley Coyote finds himself standing on thin air having chased his would-be lunch over the cliff — and then he looks down!

That’s about where the U.S. economy finds itself today, as reflected in the stock market’s nervousness if nothing else, as we wait to find out whether we will go off the “fiscal cliff” when the ball drops this coming New Year’s Eve. Like the anvil that inevitably falls from the sky, the doomsday machine that Congress created over the past three years to force itself to adopt a more rational long term plan to pay down the deficit will drop a double-dip recession on the backs of our newly-recovering economy.

Our nation would plunge immediately into a first quarter 2013 economic contraction of up to four percent by Congressional Budget Office estimates, with a knock-on effect increasing unemployment by at least one percent with severely contracting business investment and consumer spending, plunging the rest of the world into similar recessionary patterns or worsening those already affecting most of Europe, and cutting of China’s emerging economic recovery at the knees.

Inside the Doomsday Machine

What exactly is the doomsday legislation that Congress concocted to scare itself (and the rest of us, it seems) into reaching an alternative agreement on getting our fiscal house in order? Could just adopting Simpson-Bowles have been that bad compared with this?

Essentially, it’s a three-part mechanism, designed to produce about $4 trillion in deficit reduction over the next 10 years, which most powers-that-be in Washington (and more importantly in the credit rating agencies for U.S. Treasury debt) have agreed would be sufficient to constitute an acceptable level of fiscal rectitude. Simpson-Bowles combined spending cuts and tax increases to get to that figure, but Republicans didn’t like the tax increases or the absence of healthcare cost savings, and Democrats didn’t like their cuts to entitlement programs, so that proposal was shelved.

Meanwhile, we added to the existing debt with two wars, Medicare drug benefits not paid for in taxes, government spending programs on infrastructure and clean energy, and an unemployment benefits extension in order to climb out of the Great Recession following the financial crisis of 2007-08.

After the 2010 election, when the Bush tax cuts were originally intended to expire, Congress agreed to keep them on because we were just beginning to grow GDP again, but set their expiration for the start of 2013, and adopted Obama’s two percent payroll tax holiday for employees on a temporary basis again just until 2013. The combined effect of those two expirations would take about $400 billion out of the economy in 2013, raising everyone’s income taxes, jumping the rates up on capital gains and dividends and also ending the Alternative Minimum Tax “fix” that keeps that levy from hitting the middle class accidentally.

The elimination of two specific spending programs at the start of next year is also triggered at the New 2013. Also set to hit automatically and the end of extended unemployment benefits — alone saving $40 billion — and the extended reimbursement subsidy to doctors taking Medicare patients, both of which would also pull money from the economy.

Finally, the third part of the doomsday machine are the “sequestration cuts” of about $100 billion, half of each to military spending and “discretionary” domestic spending programs — excepting only Social Security and veterans’ payments — which would be cut “across-the-board.” As a way to resolve, at least temporarily, the 2011 agony over raising the debt ceiling, Congress set up this automatic structure, which neither party finds acceptable, initially to force a Super Committee of 16 of its members to come up with a better way to cut the $100 billion annually. It couldn’t, so the doomsday machine’s timer kicked in for New Year’s Day as well.

Defusing the Bomb

As is evident, this looming disaster is not the work of Mother Nature like Hurricane Sandy; it is unquestionably a result of “human activity.” It is not like the San Andreas fault, it is the politicians’ fault (and ours as well, to the extent we refuse to let our own favorites “compromise”). But Congress now has only about 50 days left to turn off the timer and defuse the fiscal bomb.

There is virtually no way a complex package of spending cuts and tax reforms of the type put forth by Simpson-Bowles could be drafted and agreed in that short time. But a substitute set of more rational spending cuts to take the place of automatic “sequestration” is already known by all parties from their 2011 negotiations, which failed over tax cut extension issue. This is a “down payment” on deficit reduction could be a “first step” that could be settled well before New Years.

The tax structure is the tough part because of the divide between Obama and the Democrats, who have insisted that taxes on the highest income groups rise as part of deficit reduction, and Republicans who have opposed even a dime of tax increases for any group, but especially the “job creators” in the top 25 of large-scale small business owners.

There Is Another Way

But Speaker Boehner for the Republicans has proposed post-election that additional revenues could be on the table as part of an overall tax reform agenda that would lower rates for all individuals and corporations. Obama has heretofore insisted that the Bush tax cuts should expire (and thereby tax rates should go up) on individuals with adjusted gross income of $200,00 and couples over $250,000 to balance the overall plan.

But there is another route to the same result, and it’s one that not only was proposed in a certain form by candidate Romney and suggested by the president himself in his earliest budget proposals. That route would not be based on higher rates but on capping the level of tax deductions for upper income individuals. Obama proposed this cap on deductions set as a percentage of adjusted gross income — he said 28 percent. Romney proposed doing so by a set dollar amount of $17,000 or $25,000, with persons choosing how to use them in terms of charitable giving, mortgage deductions or state income taxes.

Herein lies the seeds of a real deal, where Obama and the Democrats get their objective of higher tax contributions by the rich, and the Republicans get to keep and even lower the Bush tax rates for everybody, including the rich. Since the devil is in the details of where the actual tax rate and cap rate numbers kick in (not to mention working out the alternative minimum tax effects), we know that the parties could only agree on a framework for such a fix as “step two” to avoiding the fiscal cliff by December 31. That would be enough, along with the spending cut down payment, to stave off a U.S. credit downgrade, relieve the financial markets and get business back to “business.”

Filed under: Uncategorized

Content originally published on The Huffington Post

In the wake (in many senses of the word) of the aptly-named Sandy, an “October surprise” that actually proved that the Weather Bureau could sometimes be very right, let’s see if we can forecast a few more tricks and treats to come in our new month. Make it a “top 10″ list!

10) Chris Christie again makes it all about him. The man who gave the Republican National Convention keynote (maybe we should say “Me-note”) address, has managed to change his wingman from Romney to Obama as he himself looks to re-election next year and a 2016 presidential campaign that even he wouldn’t dare run against a Republican incumbent. (He should be so lucky!)

9) The biggest Senate election surprise may be that Bob Kerrey, forgotten weeks ago when he was down 25 percent against Tea Party rancher Deb Fischer, is back within a hair of winning in Nebraska and saving that seat and maybe the Senate majority for the Democrats — not to mention bringing some bipartisan sanity to a Congress that needs it even more than New Jersey needs gasoline.

8) Because of recounts and the need to consider provisional ballots in several swing states, we may not know the presidential election result until a week or two down the road — i.e., even longer than it will take ConEd to restore electrical service in New York.

7) If Obama wins the Electoral College, there will a move by Rush Limbaugh acolytes in the Republican Party to impeach the president over Benghazi.

6) Also if Obama wins very narrowly, there will be strong efforts to find a 21st century “faithless elector” who will shift his or her ballot to throw the election to Romney if he is the one who triumphed in the popular vote.

5) The imminent collapse of — you guessed it, the Greek bailout — will be an even bigger financial story this month than the “fiscal cliff” gridlock or a “hung” presidential election in the U.S.

4) When all the corporate reports for the third quarter are finally tabulated, we will again find, as we did in the first two quarters of this year, that the hedge funds and their allies on CNBC have again snookered average investors into selling their stocks because earning would surely be down in aggregate for the first time since 2009, that earnings were actually up by a percent or more. When will we learn that shills for short sellers are no more credible than boom-stock promoters?

3) Forecasters will recognize that because Thanksgiving comes a week “earlier” this year because the month starts on a Thursday, Christmas consumption should be quite strong, boosting retail stocks and returning a shine to Apple.

2) The biggest “loser” in the overall election results — regardless of whether Romney or Obama wins the presidency — will be the Tea Party (but they won’t believe it).

1) The Electoral College could actually end up tied — see my previous blog — which would only give us the result our political polarization deserves! May the Lord have mercy!

Filed under: Uncategorized