The Egyptian public is in the streets because they suspect rightly that nothing has changed in the government. The military has made some cosmetic changes but the same people are in power and they are doing the same things.

The picture in Washington DC seems to echo the concerns of the people in the street in Cairo.

The leading Republican candidate at the moment is a former lobbyist for Freddie Mac;

MF Global went out of business and customer funds cannot be located while all the regulatory authorities seem paralyzed (again);

The Senate is already trying to exempt defense contractors from budget cuts (again) set in motion by the failure of the "super committee" and

The Europeans are willing to pursue a liquidity solution to a solvency problem (again)

The encouraging news is that the holiday shopping season is off to a good start showing the consumer is feeling a little better about the economy. The average American businessmen does not stand still; he /she will respond to economic challenges by working harder, trying different approaches and keeping the overhead in check while they rebuild their business. All this is good for the economy. Most people are not concerned with global issues, what they focus on is the immediate problem at work or business. The US economy is always changing and the American people accept this fact whether it is working for or against them. We deserve leaders who have faith in us and recognize we can take bad news, we can take hard times, we will work our way out of it and what we really need is government to do is get their house in order and address the budget gap from both sides of increased revenue and lower spending.

Fasten your seat belts; it is going to be a bumpy ride. The markets are poised to sell off this morning for various reasons. I believe the main reason is lack of any political leadership in the US Congress. The Congress has shown no ability to get anything done and the failure of the “super” committee is another demonstration of this. I believe the markets will interpret this failure correctly as one side of the aisle will not / cannot compromise and that party is willing to do nothing rather than seek a middle ground on certain issues to get the country and the economy moving again.

Things to watch for this week:

1. Continuing search for money at MF Global. I expect it to only get worse.

2. New Government in Spain. This will be a test because an already weak economy has elected a government pledged to austerity measures believing this will create jobs in the long run. The question is how much more short term economic retrenchment the Spanish people are willing to endure.

3. Continued cut back of the Wall Street firms willingness to trade credit and the increasing volatility in prices of taxable fixed income bonds.

4. US Stock market as more market participants are giving up the ghost and looking for safe havens over the near term. I would expect commodities to rise as a safe haven trade.

The news from Washington will disappoint the market all week. To paraphrase someone “nobody will ever go broke underestimating the US Congress”.

Last week I mentioned three things to watch in regards to the fixed income markets. A brief recap of these situations should shed some light on what to expect over the near term. The first item was the referendum in Ohio in re public employee’s rights.  The voters in Ohio rejected the Republican Governor and Legislature program to strip the unions of most of their powers. I agree with the FT this morning that it was a question of Republican overreaching rather that any mandate for the Democrat Party. As I mentioned previously the American public understand the new economic realities in re retirement costs and health insurance. Most people will accept an adjustment in paying for the programs, what happened in Ohio was the Republicans wanted to enforce a radical agenda in addition to necessary financial reforms. The unfortunate part of this is that no progress has been made on the issues that need addressing.

This leads to the second item which is the “super committee” and their inability to reach any type of compromise in re spending cuts and tax increases. Again this is a case of the Republican members of the committee looking to enforce a radical agenda rather than take steps to solve the country’s financial issues. The country is ready for the adults to assume control of the government but there doesn’t seem to be any one on the right who has the courage to do what is necessary for the country and not just toe the line outlined by FOX news. Once again the American public is further along that our “leaders”.

The final issue is the search for money at MF Global. How in the name of everything good and holy can the regulators (CME, SEC, FINRA, CFTC etc) allow this to happen post 2008? Have they learned nothing? An overleveraged brokerage house seems to have no internal controls and cannot get financing goes out of business. After the company closes nobody seems to be able to identify where a significant amount of client money resides. This company has been subjected to regulatory audits where the regulatory authority comes in and verifies the financial health of the company. Does this make any sense? How can people not lose their jobs at the SEC, FINRA, CME, CFTC etc?  How can the Administration not demand Mary Shapiro’s resignation from the SEC?

This is one more in a string of institutional failures by the people who are paid to enforce the rules and protect the investor.

This Week

The things the bond markets need to watch this week are;

1. the referendum on public employee’s rights in Ohio,

2.  the report of the “super committee” in the US Congress on budget reduction and

3. The whereabouts of the customer funds in the MF Global bankruptcy.

Each is important for what they will tell us about the financial landscape over the near term.

The vote in Ohio is to restrict the collective bargaining rights of public employees unions and make the state workers contribute to their health insurance and pension. The governor pushed this law through the legislature and the opposition collected enough signatures to force a vote in a referendum. The financial problems facing Ohio are the same ones that face a number of states. This vote will serve as a proxy for the rest of the country as we try to put our financial house in order. Most rational people will agree the work place now requires employees (both public and private) to pay some portion of health insurance and make a retirement contribution. The Ohio law also restricts collective bargaining rights of the unions. Perhaps if the legislature passed a law just dealing with the fiscal issues and not the negotiation rights of unions there would not have been such an effort to overturn the entire effort.

The “super committee” in Congress is supposed to report on ways to cut spending, raise revenues and balance the budget. One side of the aisle refuses to accept a compromise in re revenue generation (higher taxes) and because of this it looks like nothing will be done by the committee. Across the board cuts in all areas of government might not be all that bad.

The bankruptcy of MF Global and the possibility of customer funds being missing will presage the regulatory environment going forward. The entrenched banking and Wall Street interest have been successful in preventing any restriction on business as usual. If anyone doesn’t understand that a business with 2800 employees just disappeared because they were allowed to make the same reckless bets that led to the 2008 financial meltdown and that once again the regulatory authorities who are supposed to protect the investing public have failed miserably they are just not paying attention.  Maybe this will wake up the idiots who believe that “Wall Street will regulate itself” and force them to join the reality based community.

Throw in a few European crises and it will be an interesting run-up to Veterans Day

MF Global is exactly how Wall Street is supposed to work.  After the report of quarterly trading losses, investors were no longer willing to lend the company money and without sufficient liquidity to fund operations they were forced to file for bankruptcy. After initial reports of client funds missing they seem to have found the money and the firm will cease to exist. This is the free market in its’ purest form.

The promise of Wall Street is that you can make decisions and investments and if you are right you are free to make as much money as possible. The ugly flip side is you can also lose big when you are wrong. That is what happened here, MF Global took trading positions based on expectations of future events and they were wrong; consequently 2800 people will be unemployed, bond and stock holders will lose their investment, creditors such as banks will probably receive some money back but not 100 cents on the dollar and life will go on. The good parts of this event are that the system is not threatened because MF Global is not a bank, customer monies seem to be intact, investors everywhere will question their investments and counter parties more closely and Wall Street firms will examine their own risk assessment procedures to make sure they have control over their exposure to the markets.

The broader lesson is we should make sure the system is protected by separating the banks and brokers. Capitalism is a harsh system because failure is swift and brutal and people get hurt both by losing jobs and losing money. We cannot have it only one way; if you want to succeed you need to be allowed to fail no matter how painful. Welcome to the big leagues.