Ina Drew testified before the Senate last week .Ms Drew was one of the highest paid people at JP Morgan Chase. During her last two years of employment in 2010 and 2011, she made over 15 million dollars per year. She was the Chief Investment Officer and supposedly watching the risk levels of the firm's proprietary investments. When asked about the "London Whale" debacle which blew a 6 billion dollar hole in the bank's profit, in the department she was in charge this was her reply,

 "things went terribly wrong" she said, adding that some of the large purchases of derivatives last March "were not bought to my attention on time"  -  WSJ March 16,2013

Here we have an executive making 15 million dollars a year, sitting in her office waiting to be told what is going on in her department. Hello! anybody home? Just what did Ina think her job was?

A special award for Corporate double speak and responsibility evasion goes to American Airlines. As the company emerges from bankruptcy, they are petitioning the judge overseeing the process for a 20 million dollar bonus for the Chairman of the company, Tom Horton. Tom, who led the company into bankruptcy, jammed the workers and stuck it to the investors is worth it because according the Andrew Backover an American Airlines spokesman,

“The relief requested will appropriately motivate a strong management team during the integration process to ensure the value potential of the merger is realized,”   -  Bloomberg News 3/16/13

Translation: Unless you reward management for bad behavior, we will not do the work we are getting paid to do in the first place. These people don't even have enough self perception to be embarrassed. Nothing has changed on Wall Street, we are still through the looking glass.

"Even if you depreciate the exchange rate you can't create more fish"

This quote from a governor of the Iceland Central bank illustrates an important consideration in all of our current economic discussions. Mar Gudmundsson was talking about a lower than expected export boost to the Iceland economy from a favorable exchange rate. What he is pointing out is that all economic policy has to exist in the real world. The world is finite, there are only 24 hours in a day, there is only so much oil in existence, etc. No matter how things sound in theory they must be applied in a lumpy, inefficient, chaotic world. At least in Iceland they are willing to face reality.

Compare and contrast Iceland's approach to the debate in the US. John Boehner said on Sunday that he was "not sure" if the sequester would hurt the economy but he was "concerned " about it. I have news for the Speaker, it will hurt (have a negative impact) the economy. That is not open to question. The question the Speaker and indeed the entire government should be focused on is whether we believe this slowing of the economy is warranted as necessary to long term economic health and is there a more efficient way to cut the budget so we get maximum impact from the cuts. In the late 1970's Paul Volcker forced the US economy into recession to get rid of double digit inflation. It was painful but necessary and set the stage for years of growth and prosperity. Until the politicians are willing to publicly acknowledge simple economic concepts we will be stuck in this repetitive cycle of nonsense. Decreased government spending will slow the economy down, that is a fact, whether or not this is the right time to do this, is an opinion. Very smart people disagree on the timing, that is fine, we need to let the debate air and pick a course of action.

The Pentagon is currently engaged in a marketing scheme which I like to call "Cancel the football program".  Every city and town in America has seen this before. Wherever there is a movement afoot to reign in the school budget because there is a bloated administrative structure or employee benefits have gotten out of control the first thing the entrenched bureaucracy says is they will be forced to cancel the most popular program like football in an attempt to rally support and maintain spending at the same wasteful level as before. As the March 1 sequestration approaches the Pentagon and their congressional supporters (which consists of all 100 Senators and 435 Congressmen) start screaming about weakening our national defense or talk about cutting benefits to our service people or veterans. What they are trying to protect is massive wasteful government spending that goes to their home state or district. We have enough tanks which the army says it doesn't need, or planes that don't fly all that well, or ships that leak. Politicians on both sides of the aisle are talking out of both sides of their mouths when they pretend to be concerned about the deficit caused by runaway government spending. The defense budget contains a large measure of corporate welfare.

Consequently I think a 10% cut across the board is probably a good thing, I would like to see the budget for Congress be included in this sequestration also.

The only ray of hope I see in this mess is people are finally admitting that reduced government spending will cost people their jobs. This has always been the case, it is simple economics. During the campaign it seemed as if the laws of economics were suspended as candidates tried to make people believe reduced government spending would create jobs. It won't. As a country we need an honest debate about economic choices and not live in some la-la land of economic fantasy.

This week the Department of Justice (DOJ) announced they are pursuing Standard & Poor's for fraud because of their behavior during the sub prime mortgage era. The DOJ contends that the rating agency knew the securities they were rating AAA were not that creditworthy and they were influenced by the fees they were collecting rather than any objective analysis. I have been in the bond business for 40 years and an announcement like yesterday's is equivalent to coming down on Christmas morning and finding a pony under the tree. Finally the Feds are saying publicly what every bond market professional believes 100%. The rating agencies were selling ratings to the Wall Street banks with intentional, callous and complete disregard for the investors they claim to be protecting. Bond market professionals have been complaining about the mercenary nature of the rating agencies since I got into the business in 1972. I know it is too much to hope for but I would love to see Moody's be next.

I think across the board cuts in government spending is a good idea. I would argue that a 10% initial cut might be a little heavy but a 5-7% cut I believe would be absorbed by the recovering economy and while it will reduce growth it will not push us into a contraction. Everyone in the country knows we spend plenty of money on defense, education, social security etc., so a reduction should not affect the quality of life. I hope we don't have another last minute session of Congress where the Senators and Congressmen find a way to protect the status quo and try to sell us on the idea that they have actually made progress on the fiscal situation. Cut everybody equally and move on.

How many times are we expected to buy the Brooklyn Bridge? Congress has decided to postpone the debt ceiling debate until May while they work on spending cuts. But this time they are "really, really really, really" going to address the issue. Fat chance. How dumb do we look? I have a better idea, why don't they go into a room and work out the details of exactly what they think we should do in a comprehensive form and present their ideas to the voting public. Is that too much to ask? The argument at the moment is stuck on one side saying "we don't want to pay for the spending we have authorized until you guys cut entitlements" and the other side counters with "we aren't going to do that". So the solution is to delay the confrontation another three months and run to a 24 hours news network and explain how it is not their side's fault.

What is even more unbelievable is the financial press is acting like this time is different.

Same Old / Same Old Department:  According to a NY Times article this weekend three Senators who receive heavy contributions from drug maker AMGEN managed to insert a $500 million price break in the fiscal cliff resolution bill that will be paid for by higher cost for Medicare. So the next time you hear Max Bacus (D- Montana) or Orrin Hatch (R- Utah) or Mitch McConnell (R- Kentucky) talk about cutting the deficit or fiscal responsibility you will know they mean it for everybody but the drug company that owns them.

Like most Americans I am fed up with the Senate and the House of Representatives. Over the years they have passed spending bill after spending bill and now they want to debate whether or not we should pay for the programs they instituted. If they don't want to pay for them then they should cancel them. How hard is this? Don't try to sell me some nonsense about fiscal responsibility, if Congress were fiscally responsible we wouldn't be having this discussion. The country has bigger issues than a made for TV drama about the debt ceiling.

There are signs of intelligent life starting to emerge, even on Wall Street. The board of JP Morgan has reduced Jamie Dimon's comp because of the trading loss in London. It is difficult to feel bad for someone who has to struggle through the winter on only 11 million dollars but the fact that the London loss was his fault and it is recognized as such publicly is a step in the right direction.

The US economy feels a little sluggish which I believe is due to all the noise about the "cliff". I believe the real estate sector will continue to improve, the earning of major US companies will be fine and the private sector will expand as the recovery continues. Congress has just approved a 60 billion stimulus package in hurricane relief and any spending cuts that Congress manages to pass will be minor. It is almost like the current uproar about gun control will give the politicians in DC the perfect cover to avoid any real progress on the deficit. In an ideal situation, the recent minor tax increase combined with a minor reduction in government spending, plus an improving economy should create better deficits numbers by year end. Stay tuned.

On Monday December 31, 2012 I bought some call options on the S&P 500 (SPY) because in the midst of all the noise about the fiscal cliff I believed that Congress only cared about how bad they would look if they did nothing. I am pretty sure Congress doesn't think in terms of what is good for the country they only think about what is good for Congress. I thought that if they did something (anything) the stock market would react on the upside only because Congress wasn't totally dysfunctional. This morning I sold the options for a profit. I did it as soon as the market opened because I think once the markets realized how little the House and Senate managed to do the rally would fizzle pretty quickly. This is a pretty silly way to make investment decisions.

2013 will be a difficult year for the markets. I expect:

The political situation remains confused and contentious and rancorous and ineffective.

Bond yields will remain low but there will not be the price appreciation witnessed over the last few years.

Stocks should be everyone's first choice and if the politicians don't manage to kill the economy, equities could be in line for a solid year.

With low interest rates I expect the housing sector will continue to improve.

Private sector credit quality will continue to improve and municipal sector credit quality will continue to slide.

I think John Boehner is done as Speaker of the House