The silly season is upon us. Apparently the House of Representatives flunked 6th grade civics and doesn't really understand how our system of government works. If you want to get rid of a law you need to pass the new law in both houses and send it to the President to sign and if the President vetoes it you need a super majority to overturn it. This would entail making a coherent case for the new law and working hard to convince people that this is in their best interest. It is much easier to keep shouting to people who agree with you and avoid the messy process of actually doing something constructive. I guess we get the Congress we deserve. As an aside I do not know whether the Affordable Health Care Act will be good or bad, I do know as a business owner for 30 years that the current system is too expensive and inefficient.

I think if Congress is willing to "shut" the Government they should go all the way. Close the airports, the ports, the interstate, stop funding for Congress including pay for members, don't send Social Security checks, turn out the lights in the Capitol, tell the soldiers to go home, stop the defense plants in the congressional districts, etc. The current shut down has all the sincerity of a TV "reality" show. Just when you think Congress can't sink any lower they manage to lower the bar, again.

Wall Street is constantly changing. If you listen to the news media you would think that everything remains the same until Congress or the SEC decides to increase regulation or get more involved. That is not the case. Recent volatility in the financial markets have an very important lesson for the immediate future and provide an insight into the state of the US markets. This lesson is lost on most bond fund managers, which is why if you are invested in a bond mutual fund you have been getting killed recently. Wall Street has been quietly cutting their risk profile,not in response to the hue and cry of Congress but because a lower risk profile make better economic sense in terms of profitability. The fact that the big trading firms are less willing to carry inventory means that when institutional investors want to sell large blocks of bonds the price will drop farther and quicker than expected. A study of the corporate bond market in the late spring / early summer or the municipal bond market this summer will illustrate this point.

Wall Street firms have learned lessons from the financial crash of 2008, mutual fund managers have not.

Congress, who never cease to amaze, is warming up for another bogus discussion of the debt ceiling. Since all revenue bills must originate from the House the fact that the House is now considering not authorizing the funds to pay for the laws they have enacted makes less sense that usual. It is the equivalent of holding a gun to their own head and threatening to shoot themselves unless you stop them from doing what they just did. This is not fiscally responsible, it is just stupid.

Random thoughts upon returning from vacation;

S & P is running radio ads touting what consummate professionals they are and how they " have taken to heart the lessons learned in the financial crisis" . What they have neglected to do is take responsibility for their actions in creating the aforementioned "financial crisis". S&P is acting like the financial crisis was some random event rather than a completely preventable occurrence if firms like Moody's and S&P had done their job.

Why does everyone admire JP Morgan as the "good" bank? In the last year they have admitted their risk controls are non existent (London Whale), paid large fines for manipulating both the natural gas and aluminium markets and been knee deep is the bogus financing that wrecked Jefferson County Alabama. If they are the good guys, what do the bad guys look like?

Fabrice Tourre of Goldman Sachs has been convicted of securities fraud in a highly publicized case recently. Maybe all the young hopefuls who swallow the Goldman Sachs kool-aid will pause when confronted with an ethical dilemma and at least think about it before trying to prove how clever they are. Secondly, does anyone think that Fabrice's boss had nothing to do with the fraud?

Nothing has changed in Europe in re countries like Greece, Portugal, Spain, Italy, Ireland etc. The only hopeful sign is that now the European Central Bank (ECB) realizes they must try to stimulate the economy. The bank tried to solve the liquidity and fiscal crisis by contracting economic activity through "austerity." I am not sure what economic theory they were using.

In the Wall Street Journal on June 4, 2013 section C page 1 there was an article which discussed the fact that an entity lyrically titled the "Financial Stability Oversight Council" (FSOC) which is led by the Treasury Department has decided they should designate certain companies as "systematically important" and should therefore "keep an eye" on these companies. 

As a bit of background the voting members of the FSOC are; 

• the Secretary of the Treasury, who serves as the Chairperson of the Council;
• the Chairman of the Board of Governors of the Federal Reserve System;
• the Comptroller of the Currency (OCC);
• the Director of the Bureau of Consumer Financial Protection (CFPB);
• the Chairman of the Securities and Exchange Commission (SEC);
• the Chairperson of the Federal Deposit Insurance Corporation (FDIC);
• the Chairperson of the Commodity Futures Trading Commission (CFTC);
• the Director of the Federal Housing Finance Agency (FHFA);
• the Chairman of the National Credit Union Administration (NCUA); and
• an independent member with insurance expertise who is appointed by the President and confirmed by the Senate for a six-year term.

And who did these worthies decide they should keep an eye on? Wait for it -  AIG

AIG - are you kidding me? Five years after the financial crisis when the egregious behavior of AIG almost ended western civilization as we know it, and these protectors of the commonweal are just now getting to the point where they believe they should watch AIG to make sure they don't do it again. You can't make this stuff up!! The amount of money the US taxpayer had to pony up to bail out the company and its trading partners (read JP Morgan, Goldman Sachs, Morgan Stanley etc.) was astronomical. The fact that AIG even exists is an artificially created miracle. Is there anyone in DC that understands what happened in 2008? 

I don't want to be too negative but with public servants like the above it might be time to stock up on bottled water and canned goods and head to northern Idaho. I don't like our chances.

 They are back! The rating agencies (Moody's, S&P And Fitch) who didn't have the good sense to crawl under a rock and die for their part in the 2008 financial crises have returned. After indeterminable testimony before Congress where the CEO's all swore their behavior did not reflect the high ethical standards of the company, the agencies are up to their old tricks. An article on Bloomberg titled Ratings Shopping Revived in Asset-Backed Rebound discussed the fact that the rating agencies seem to be selling their expertise again to the highest bidder. The quote below is from the article and sums it up rather neatly;

 “Imagine the pharmaceutical industry having six FDAs, all competing to approve drugs,” said Rob Dobilas, who founded Realpoint LLC, the credit-rating company bought by Morningstar Inc. in 2010, referring to the U.S. Food and Drug Administration. “Everyone would be dead.”

The rating companies like to hide behind the bogus theory that they provide some kind of objective evaluation on securities when they are in the business of selling their ratings for money. I have news for the CEO"S who testified before Congress, their egregious behavior was exactly who they are. Their behavior reflected their ethics and standards perfectly.

In February, I wrote about the budget game I called "Cancel the football program." The first winner in the game is the FAA and their furlough of the air traffic controllers. They took the path of maximum inconvenience for the public and parlayed it into getting a release of long term capital improvement funds to cover wages. "Special Assist" goes to every member of Congress who voted for this supposed fix to the sequester. Congress ( both House and Senate) tried to force themselves to actually make policy by imposing the automatic cuts if nothing got done. Now they are in the position of working diligently to avoid even that consequence of their ineptitude. In the weeks to come I expect every other agency involved in the sequester to try the same thing.

There was a good article in the Financial Times this weekend concerning the debate about austerity vs stimulus as the better policy for the current state of the US economy. The article reviews the experience of England, Ireland, Japan and Spain to their austerity policies and the attendant problems and progress. It seems like all major world economies are regressing to the middle as the severe austerity countries (Ireland, Spain) are beginning to pursue expansion mostly in response to high unemployment and the stimulus countries (US) are beginning to address long term debt levels. As I stated earlier this year I believe the sequester will not be enough to push the US economy into negative growth. It will however slow things down.

The commodity markets are telling us that the world economy is slowing down. Besides gold dropping like a rock, many other commodities are weak. This is based on perceived weak demand for commodities in the future. With Europe and England making a conscious decision to opt for austerity a few years ago the last glimmer of a growing economy was the US. We have not actually felt the effects of the sequester but the perception that the US is willing to forego growth and cut government spending to start correcting the deficit is enough to push the world economy onto a slower track. In the US, this slower track will manifest itself by showing lower growth and lingering unemployment into late 2015. For the rest of the world, the effect will be magnified when combined with their existing austerity measures.

Europe has not made much progress with their existing problems. Portugal and Ireland requested and received an extension on their bail out payback. Greece is same old, same old. The unemployment numbers in countries like Spain and Italy are enormous. There seems to be a recognition that the EU should look to a more pro growth and a less austere monetary policy. It is impossible for any economy to correct its deficit or overspending history without growth. No growth, no increase in tax receipts, no increase in job creation, no decrease in unemployment. All this talk about confidence and job creation is hokum because unless a business senses an opportunity to expand it will not add jobs.

The commodity markets are pointing to a worldwide contraction, the bond market is on board, the train is leaving.