Playing 52-Pick Up with Your Grandkids.

February 27, 2011

Major market indices were higher last week. The DJIA rose 0.96%, the S&P 500 increased 1.04%, and the Nasdaq gained 0.87%. Value stocks outperformed growth stocks. And the small cap index gained 1.55%. The 10-Treasury yield closed 5 basis point lower, closing at 3.58%.
President Obama submitted a $3.7 trillion budget for 2012. The budget contains spending cuts and increases. It further contains tax cuts and increases meant to cut $1.1 trillion from projected deficits over a decade.
The budget does not address Social Security. Nor does it tackle rising health care costs, Medicare and Medicaid. And it proposes only marginal reductions in military spending.
Some lawmakers postulate that the budget accelerates America's "dangerous trajectory" towards a national debt catastrophe. Pundits say the president "shouldn't be surprised if the U.S. bond markets, not Republicans, end up determining his political destiny." And they are accurate in that assessment.
The Bond market has often served as a "canary in the coal mine" when there is economic trouble afoot. Some of the smartest, most capable minds in finance earn a living in the bond markets. They are tasked with forecasting everything from interest rates to whose balance sheets are over-burdened. They gauge the effect of variable expenses like commodity prices on budgets, expenditures and inflation. And they do so much more.
And therein lies the problem. The so-called Bond Vigilantes have already attacked the likes of Greece, Spain, Ireland and Portugal. They have caused global capital markets to rethink the validity of the Euro, and the Union. At what point do they sense the impending weakness in the U.S. dollar, as well as the nation's untenable deficit issues, and pounce?
Wolves will only track a wounded elk for so long. At some point, the act of stalking the hurt animal becomes superfluous. The urge to attack is irresistible.
A sudden and sustained turn in the sentiment towards U.S. debt will have much broader ramifications than simply causing prices to fall. It would be financial chaos. It could make 2008 feel like the tremor before the quake. The chaos will spread out in concentric, economic circles around the globe.
At some point, our political duopolists in D.C. are going to have to join hands and sing Kumbaya on our debt load. But addressing that issue will be like telling your boss that he needs to lose weight. It may be in his best interests, but you'll likely be fired for raising the issue.
The first steps are the most difficult. And those who begin that journey may not be the ones to finish.
The weekend protests in Wisconsin show what transpires when someone, in this case Wisconsin's Governor, begins to take the first steps in trimming the fat. Nobody will willingly divest themselves of benefits once given-regardless of how out of synch they may be with their mainstream corollaries.
Consider Roosevelt's New Deal. Many of its facets were created to help an ailing population through the Great Depression. 78 years later, it looks like that children's game, "52 Pick-Up." Sounds fun. And then you're forced to get on your knees and pick up the mess you had no hand in creating.
Until one of our political elites has the courage to climb on this roan bull and ride it to the death, then we all stand a chance of getting gored. You, your children, your grandchildren. And so on, in perpetuity, until it happens. Because it will. Unless someone has the courage to do something. Something that may not get them re-elected.
Talk about bad odds. Stay tuned.

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