As Budget War Heats Up, Expect Stocks to Fall

You don’t need to be a chartist to see that the stocks will need to test the key low made in mid-March before anything serious happens. For the Dow Industrials, that would imply a fall of 378 points from these levels to 11556, or about three percent. What then?  Although a bounce seems likely,  we wouldn’t expect it to last for more than a few days, if that long.  Moreover, because the support is so obvious, we should expect the Indoos to dive toward it in the days ahead rather than approach it gingerly.  After all, why would traders buy the blue chip average as it is falling if they “know” it’s going to fall at least to the support?  We might expect such buying and for a bullish turn to come from somewhere above 11556 if the market had a reason to rally. In fact, The Great Recession seems to be edging toward another flirtation with Depression – one predicated on further, intractable weakness in the real estate sector, along with whatever psychological fatigue is about to hit as a result of QE2’s epic failure to stimulate much of anything.

With respect to the stock market, we would ordinarily employ the Hidden Pivot Method to forecast price action for this summer. (You can learn to do this yourself, and to do it impressively well, by clicking here).  In this case, however, our target of 11506 only gets us halfway to the next logical low.  Once again, you needn’t be a swami to see that the Industrial Average will fall to 11000 if the mid-March low gives way.  The only question is, how quickly will it happen?  Our hunch is, very quickly, especially given the prospect of a budget battle on Capitol Hill. Although until recently we had viewed the debt-limit issue as a red herring, it’s starting to look as though the Republicans, goaded by Tea Party stalwarts, will dig in their heels.  As why should they not, considering that the Democrats are apparently serious about trying to balance the budget on the backs of America’s small businesses?  Obama and the Democrats still seem to think that anyone grossing $250k is a fat cat, but in reality that is the threshold at which small businesses in this country begin to enjoy success — and with it, the prospect of hiring more workers. Leave it to Obama and the tax-and-spend crowd to pounce on the only sector of the economy with the potential to rejuvenate it.

Republicans are right to resist, even if it brings the U.S., ostenisbly, to the brink of default. And anyway, burdening the country’s most energetic and productive earners with stiff new taxes would raise a pittance in comparison with the trillions of dollars in debt The Guvvamint has run up in the name of stimulus. The impending fight on Capitol Hill isn’t going to be pretty, and we should therefore not be surprised if stocks fall hard in the weeks ahead.

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  • veranop June 28, 2011, 9:22 pm

    @john

    That is exactly what I was thinking. I must be dumb, if I can’t find a way to suck on someone else’s wealth.

    Further, I must be dumb since I can not find any justification for income redistribution. To me, to violently take someone’s income and give it to someone else was always a crime. I always believe in “If one man can do it, another man can do it as well”.

    But even beyond that, let us say that there is a man who makes more money than I do. Should I now lobby the government to violently take from him what is his, and give it to me?

    Is this the “society” that you advocate for?
    I can not agree. That is not a society, but a mob, albeit an organized one, for it simply replaced random highway robberies with an organized take by the biggest gang, the government, using the tax brackets.

    If you and I have anything in common need, that probably would be the need for defense, and a court of justice. For that, I am willing to pay, but again, why should I pay any more than you do? It should be exact same amount, notice that I didn’t even say “an equal tax rate”.

    What?
    Did I hear you mentioning that since I have a bigger income to protect, then I shall pay more? Funny, but I do not hear you saying that the ones using subsidized public transportation should be paying more, that the ones using public schools should be paying more, the ones using welfare should bear the brunt of it, than those using it lightly or those never using it.

    Oh yeah, and here is another one of communist arguments coming right back: why don’t you just create more income to protect, because it had been pointed out to me that I could use public schools if I wanted to?

    This communism, this inability to keep the hands away from other people’s pockets is the reason we are going down, and not anything else.

  • fallingman June 28, 2011, 8:49 pm

    Not everyone is just waiting for the slop to be delivered to the trough. And some people have the strength of character to refuse to be an accessory to a crime even if they’re in on the split of the loot.

    If refusing to troll for “benefits” is dumb, I don’t wanna be smart.

  • veranop June 28, 2011, 5:28 am

    Yes, sure, let’s fix the government, let’s not allow it to go bankrupt! That government that believes in theft, in violence, and that somehow it has no limits as to what it can do! Yeah, let’s pay more taxes!

    We can just cut the “services” can we? Oh no, no, we can’t! If we do, then I am going to stop receiving welfare! Oops, I never did receive it. Subsidy? Never happened! Wait, as I go through supposed “benefits list” I can’t find anything that was rolled towards me. NADA! It is always someone else who needs to keep their “Dignity”. As for me, I do not deserve any dignity, I only deserve to keep paying taxes.

    You know what, Avocado? Go ahead. I really do not want to explain how we got here and what will happen, because, I have noticed, that those who want to steal from me do have a very short attention span, and it is not possible to explain anything at all to them.

    Raise the damned taxes. Be my guest. Treat me like a pig, keep calculating how much can you extract from me before it would stop making any business sense. I see you are very sure that I am a pig, and will keep hiring you.

    But you know what? I have found a place where less taxes is required. I am sure since you do not comprehend that theft if wrong, I have to do this this way, they way you understand me. I have found a thief, not unlike yourself, that wants less.

    So, I am moving, with my capital, skills and ideas. I am leaving you to pick up my tab. Go ahead and grab all the “opportunities”. Hire your welfare friends. Get taxed. Live rich life. I don’t want any of it anymore.

    I am sure that being so fluent with tax rates, business justifications and finding opportunities, you will have no problem restoring the country.

    I could not care less, since none of it is for me anyway.

    • fallingman June 28, 2011, 5:39 am

      Yeow. That was good.

    • john June 28, 2011, 5:48 pm

      “We can just cut the “services” can we? Oh no, no, we can’t! If we do, then I am going to stop receiving welfare! Oops, I never did receive it. Subsidy? Never happened! Wait, as I go through supposed “benefits list” I can’t find anything that was rolled towards me. NADA! It is always someone else who needs to keep their “Dignity”. As for me, I do not deserve any dignity, I only deserve to keep paying taxes.”

      If you can’t find any public goods/benefits that roll towards you then your problem is rather obvious…you are “blind, deaf, and particularly DUMB. Or if not any of those, then just a liar will do.

  • SB June 28, 2011, 3:07 am

    Anybody requiring someone else to pay “more” in taxes has another name…”thief”. I’ve recently made $150k/year…am I rich? Hahaha. You can get a decent (not extravagent) house…put some money away for retirement and the kid’s college education (provided you start early enough and don’t have too many kids). So, unless you have to go into debt to your eyeballs to fund your kid’s education and you have a retirement account, you’re considered rich and should be taxed more by these govt. bozos? I can’t say it any more succinctly than this…go piss up a rope.

    My main reason for not supporting more taxes is that the govt, regardless of whether it is the federal, state, or municipal, simply cannot find a way to spend less than the revenue they receive. If you give them more revenue, they will simply spend more than they have. Go look up the spending by govt. over the last 30 years…they can’t keep within their means to save their life…and therefore shouldn’t be given more.

  • Jill June 28, 2011, 12:50 am

    Gosh. Just finished watching that video. The first part makes sense but he goes kind of haywire at the end, LOL. Definitely worth seeing it for the first part of it though.

  • David June 27, 2011, 10:31 pm

    The media has done a good job of defining the “Rich” as a couple making $250k a year. That’s not even upper middle class. If you make $100MM a year and up and can afford to own your own personal jet, then you might be considered rich. The question we should be asking is not how to pay for all this debt. The 1.5 Quadrillion in derivatives created by the bankers is illegal and can never ever be paid off. Just like credit card companies that collect interest on the debt, these bankers don’t ever WANT to be paid back. They just want to steal all of humanity’s labor through interest payments. Google paid 2.4% tax last year, saving them billions. GE paid no taxes on $5Billion in profits last year. But, no, lets focus on the middle class (aka milk cows) and not these off-shore globalist. Here’s some edumacation on why we are all going to be feudal serfs to these banking masters:

    http://www.youtube.com/watch?v=jESrVl3tvLo

    • Jill June 28, 2011, 12:39 am

      Now that’s one observant commentator there. Thanks, David, for that video.

  • C.C. June 27, 2011, 9:07 pm

    Define ‘Rich’.

    – Is there a certain set amount that qualifies one as being so?

    – Is there a defined path or parameters within which one obtains his wealth that qualifies him to be ‘rich’?

    – If I own a business in California that employs 10 or so people, pays their health benefits, etc., pay taxes in every category that are at the highest percentile in the nation and I still manage to bring home ~$300k or so/year, am I rich?

    – And if by the aforementioned parameters, I do qualify as being ‘rich’, what therefore should be my additional tax burden in order to bring more ‘income equality’ to the equation…?

    It is all so nice and egalitarian to fight against social/income ‘inequality’ – chiefly because it is the express way of coming to a one-size-fits-all solution to a complex issue. However, Neo-Bolshevism aside for a moment, how would we carefully ferret out the qualifications for being ‘rich’, while maintaining ‘equality’ for everyone…? Of course the answer is easy, but it helps from time to time, to slow down and start asking the obvious questions and logical conclusions of a certain train of thought before it becomes the madness of crowds.

  • bob June 27, 2011, 8:20 pm

    Since when has someone’s income become someone’s else’s problem. America has always been about opportunity and the discussion should be about how we are going to provide more opportunity in this country. Where we are at is obviously not working. I think the Tea Party has it right we need to take back our country, and let the chips fall where they may, There is no going forward on the current path. There is only heartache and pain and I say we need to take a chance on returning this country to the nation with opportunity that is once was. Throw the bums out whatever we build will be better than what we have.

  • SRV June 27, 2011, 7:32 pm

    I see the “protect the small business” mantra as nothing more than a straw man set up for the corporate sociopaths to hide behind.

    OK Rick… lets go to $500K combined income (is that enough for you?). Run it by some of the clerks, service, and hospitality staff you engage on a daily basis and see if they think anyone making over $500K needs protection. Tell them why they should pay for the obscene incomes of the super rich earned in the corrupt Wall Street Casino… how much is enough Rick?

  • C.C. June 27, 2011, 6:42 pm

    Short term? Everything is lining up – if not eerily similar to last summer, then right on schedule as planned. If the market begins to fall precipitously and unemployment breaches the 10% line-in-the-sand, you can bet that any/all fiscal tools will be employed to protect the image of ‘recovery’. There will be no ‘wait & see’… They cannot and will not let these past (2) years of gains evaporate in the middle of an election cycle without acting. #1. Allowing the economy to fail at this point would be the ruin of re-election campaigns for many sitting in office. #2. It would put monetary authorities further into the well of no-confidence for talking up ‘recovery’ and then purposely letting it fail.

    It’s a howl to read so many newsletter writers (thankfully not here) proclaim the end of QE2 and all the horrors about to befall us – as if the political-machine is content to sit back and let the market sort out all the imbalances without any interference…

    I don’t think it quite works that way anymore – unfortunately.

  • Alchemisteve June 27, 2011, 5:53 pm

    Who was the first one to start calling names?
    (“stupid”)
    Game over–you lose!

  • Jacques Redou June 27, 2011, 5:32 pm

    Avocado obviously doesn’t know much about small business (or this economy). My small business fed 3 families for 18 years. I had lower overhead than Wal Mart and never missed a payroll.

    I paid almost half of my income in taxes:

    As I recall,

    28% federal income tax rate
    15.3 % self employment SS and Medicare
    Plus state and local taxes came to almost
    a 50% tax rate.

    I could have supported another 2 families on what Fed.gov took in taxes.

    Where I live, half the people are on welfare
    of one form or another.

    But Uncle Sugar took that tax money and paid a woman to Not Work, and she got a bonus every time she had another baby.

    The kid’s father is standing on the corner
    drinking wine, and in and out of jail.

    Welfare has destroyed many, many, families
    where I live – when Uncle Sam pays the woman to get rid of the man.

    I could have employed that man.
    He would then have a JOB.
    The woman would then have a Husband.
    The kids would then have a Father.

    Or, if I just took that money and spent it
    on steaks, or a boat, or a vacation – the
    waitress, the boatbuilder or the hotel
    maid would have gotten Paid.

    Uncle Sugar’s Welfare State is collapsing.

    Will they let the Productive People lead us
    out of this Economic, social Mess?
    Or will Uncle Sugar continue down the same road – Socialism is Shared Misery.

    • fallingman June 27, 2011, 5:44 pm

      Socialism is just another word for slavery..and massa is a mean S.O.B.

    • john June 27, 2011, 8:39 pm

      ‘My small business fed 3 families for 18 years. I had lower overhead than Wal Mart and never missed a payroll.

      I paid almost half of my income in taxes:’

      Your egoism is sad. I went from being a self-employed builder/carpenter to a four man partnership. Instead of “my” business “feeding 3 families,” and me keeping the lion’s share of the income, my partners were extended the opportunity to quickly grow into equal partners. None of us paid the marginal tax rate that you paid. My heart bleeds for your loss.

  • Benjamin June 27, 2011, 5:09 pm

    If one were to ask me, O and crew are out to sink small business in order to cut competition with present and future government enterprise. Put another way… How much “cheaper” would a GM EV cost if, say, 20% of all small business were put out of commision, due to higher taxes making short-term credit less affordable for them?

    But small business is going to take a big hit anyway. The only question is whether by taxes/govt enterprise, or by the (temporary) void in wake of steep government spending cuts and default on existing debt. Since the pain is coming either way, might as well take out the beast in the process…

  • mario cavolo June 27, 2011, 3:17 pm

    and meanwhile we just watched cotton do an historically unprecedented 5 minute drop from 167 to 123…(check out the weekly chart going back 5 + years) what kind of an economic market world do we live in today…? Global increased “demand” for commodities takes the price to 220, then its cut almost in half? Will there be an investigation to “explain it”…?…not any more so likely than why there aren’t any bankers in jail yet either after the fleecing of the world’s most powerful country…

    • Rick Ackerman June 27, 2011, 4:32 pm

      Let Krugman try to explain it: The “exception proves the rule” of the efficient-market hypothesis, is what the Nobelist would probably tell us.

    • John Jay June 27, 2011, 4:34 pm

      Mario,
      The longer they get away with it, the bolder they become. The banks turned the global housing market into a casino with the Fed backing them, and changing the rules after the fact to perpetuate the fraud. It will only get worse, the MSM is already annointing the latest shills for the next election along with phony poll results and hand picked adoring crowds for the nightly news. Upcoming elections mean time for headline prices like gasoline to drop a little from over $4 to $3.50 so MSM can focus on that and not the fact that gas was $2 when Obama got into power. Where is Colonel Kurtz when we need him now more than ever ?

  • roger erickson June 27, 2011, 2:59 pm

    Growth world wide is not at all guaranteed. Europe is playing with repeating the class-wars of 1914-1945.

    http://neweconomicperspectives.blogspot.com/2011/06/whither-greece-without-national.html

    Meanwhile, our two gang-warfare parties are both misrepresenting selected necessary but not sufficient data points to keep policy safely a day late & a $Trillion short (and on the wrong things). Accordingly, it’ll be gay marriage in NY that jump starts the economy.

    Meanwhile, China – the country that is supposedly “loaning” their fiat currency so everyone else can borrow local fiat currency – is getting by with fiat deficits that no one else seems worried about. China would like Europe & the USA to remain befuddled. Who wouldn’t? To me, this amount of unstable logic looks like a South Dakota flood spilling over the real economy – which has overbuilt in the wrong places (the F.I.R.E. sector).

    “China plans to stimulate domestic demand”
    http://www.reuters.com/article/2011/06/26/us-britain-china-idUSTRE75P1V120110626

    They may just declare victory (over inflation) and go home. who could argue with fiat data? :)))
    “Chinese premier declares inflation victory”
    http://www.ft.com/intl/cms/s/0/cb7c26c2-9dc2-11e0-b30c-00144feabdc0.html#axzz1Q9xPjWRv

  • Avocado June 27, 2011, 1:36 pm

    “Obama and the Democrats still seem to think that anyone grossing $250k is a fat cat, but in reality that is the threshold at which small businesses in this country begin to enjoy success — and with it, the prospect of hiring more workers. ”

    So you are going to tell me that if taxes go up on individuals making more than $250K and running a small business, and they see an opportunity to hire 10 more employees to expand sales and profits by 3 times the total cost of these employees they WON”T do it because they will pay higher taxes on their income?

    This is the nonsense we’ve been hearing from the right for years. But nobody bothers to check their facts, they just spout it out like it has meaning. No wonder we are in such trouble!

    So how did small business survive and thrive in the days of 90% top marginal rates? Or the 70% rates during the 70’s?

    Doesn’t anyone bother to check their facts anymore?

    I’m NOT suggesting that raising taxes is the ONLY answer to the deficit problem, but I can TELL you that we cannot get to surplus on spending cuts alone. For the last 50 years we’ve been demanding more from Washington while paying less and less and now its time to pay up. Or give up all those benefits we seem to want, like ethanol and oil subsidies, all the business and personal deductions, as well as the obscene capital gain rates that primarily benefit traders.

    We had MUCH higher tax rates when the economy was doing a LOT better than it is now.

    HOW can that be possible? I thought high tax rates would kill the economy, yet GNP grew a lot faster when rates were a lot higher.

    The lower the top rate has become the slower the growth of GNP.

    This is GOOD for us?

    Andy

    • Steve June 27, 2011, 3:46 pm

      Andy, You run a small business ? Have you been put out of business by 500% increases in manufacturing costs stateside while everyone else outsources the labor to China ? Maybe the thinking is from 40 years ago about manufacturing when everything used in a GM car was made by American workers. Today a GM car is assembled from Mexican and Chinese parts with the ‘fat’ of the profits and labor gain going to the foreign market.

      Maybe we are trying to compare 1971 with 2011 ? In 1971 corporations paid most of the taxes and the individual took home the sweat of his brow and then decided which corporation he chose to support by purchases instead of the Big Brother taking the wages and giving to those who didn’t work. There are lots of differences between corporate and individual taxes, and in 1971 we didn’t have all the LLC, LLP’s, quasi S-corp garbage that the accountants and democrates created in some committee in D.C. so that they “the elected” could cut their gravy fat and thick.

      As for me. I have asked for nothing but guvernmunt to get out of the way and quit supporting the Bankers and Corporate C.E.O.s, quit committing terror across the globe, quit violating every known law, and stay bound by the Constitution (fat chance). The major wrongs since 1971 seem to have been the guvernmunt getting involved in insurance and healthcare, and automaking, and banking, and freedom, and Liberty and mostly abusing the theory of Interstate Commerce. There are more and more abuses of the Interstate Commerce Clause until the point Obamacare is under Article I, sec. 8, cls. 3 Commerce Clause under the theory the government has the Right to keep its subjects healthy to they can produce more product per hour.

      And just one other theory of mine – NEVER TRUST ACCOUNTING RULES, OR THE GOVERNMENT ACCOUNTANTS as they have cooked the books and are inauthentic – Or should I just say the GURVNMUNT and their corporate workers are freaking LIARS.

    • fallingman June 27, 2011, 4:20 pm

      Oh yeah, those opportunities to earn three times my investment.

      Do they exist for some? Of course. And some will ignore the tax burden and the hassles of taking on employees and take the plunge.

      They do not exit for most. Slam dunk opps to make 3 times one’s investment are rare for most small businesspeople And you conveniently ignore risk. The best laid plans of mice and men so often go awry.

      One may THINK one has a great opportunity, but one never knows for sure. As a result, higher taxes will always act, at the margins, to depress economic activity. And with the economy on very shaky ground, you look around and say, you know what, it ain’t worth the risk. They’re punishing risk-takers.

      You also seem to think it’s just about the money. It’s not. I was making one hell of a lot of money operating a consulting business that had very low overhead. There was absolutely no reason for me to fold my tent from a financial standpoint, and yet, I did, partly because I was damn tired of being a mule for the government and financing their idiocies and depradations. I didn’t want to feed the beast anymore. My doctor has cut back how many patients she sees for the same reason.

      I also got tired of the 10-14 hour days, every day, six to seven days a week. I chose to have a life. Ditto the doc and her husband.

      So, yes, I suppose you can make some dubious assumptions, do your sterile calculations, and come to the conclusion that tax rates don’t matter. But they did for me. They do for my girlfriend, who just recently decided to forego a fairly aggressive expansion. It probably would have been a money- making decision, but her health was already suffering from the load she currently handles, and the prospect of having to serve as a funding source for the escapades of the likes of George W. Bush and Barackarama made her nauseous.

      You are correct, sir, when you say that we are not currently paying for the expenditures the Feds are making. The answer is to cut the livin’ bejeezus out of the spending AND cut taxes. The cancer that is the Federal government must be starved before it kills us.

      Rick is right on.

      The taxpigs never want to face the simple and obvious fact that when you tax something you get less of it…and when you subsidize something, you get more of of it. If those two statements don’t strike you as axiomatic, I’m wasting my time.

    • Avocado June 27, 2011, 4:24 pm

      Steve,

      So as a small business owner if your marginal tax rate is going to go to 40% on income over $250K that means if your income rises to $350K you will pay an extra $5,000 in taxes. You would currently pay $35K on that extra $100K, if we raise the rate to 40% then you will pay $40K.

      This means you will not hire the 10 employees that might generate that extra $100K because you will have to pay an additional $5K in taxes.

      Are you REALLY that stupid? You will forgo an extra $60K in income over a tax increase you don’t like?

      Better to make $250K minus taxes than make $350K and pay an additional $5k in taxes.

      Does this make any sense to anyone?

      Andy

    • Rick Ackerman June 27, 2011, 4:26 pm

      Your memory is poor, Andy, your “facts” are stripped of meaningful context, and you have taken exception to a statement that is absolutely unexceptionable — i.e., that Obama and his ideological thugs wants to treat $250k earners as though they were fat cats.

      Just for starters, try bringing bracket creep into your argument about the halcyon days of the 1050s.

      Here’s something interesting to read: Ayn Rand Was Right: Wealthy Are on Strike Against Obama

      The link:

      http://biggovernment.com/waroot/2011/06/21/ayn-rand-was-right-wealthy-are-on-strike-against-obama/

    • Anon June 27, 2011, 4:35 pm

      I love these socialist who think the answer to all problems is just “tax more”. ALL taxes are THEFT period and I for one am tired of being robbed. No matter how “low” taxes are, they are never ever low enough.

      I was a small business owner some years ago and got tired of supporting big gvment. I mean why should I take all these risks and work my arse off only to be robbed more and more the more productive I became. So yes Avocado there are some (and I would bet many) who do just as Mario stated and I did (read Atlas Shrugged for a good explanation of how this works).

      p.s. I do not want the gvment to spend and support all these useless things that they do so don’t attack me with your socialist arguments.

    • A. RandFan June 27, 2011, 5:28 pm

      Avocado,
      It seems to me the Government leviathan grows ever bigger by taxes or borrowing. You really think more taxes will provide a balance to The Budget? That is a laugher. As Rick has referenced in the article above by Wayne Allyn Root there are effects to their causes. ” Live for yourself…there’s no one else more worth living for. Begging hands and bleeding hearts will only cry out for more”

    • fallingman June 27, 2011, 5:42 pm

      Yeah, running a small business is SO EASY. The money just pours in. Who cares if they steal a little more money from ya.

      Have you noticed that small businesses aren’t expanding NOW? And you want to provide even greater disincentives? BRILLIANT!

      You could be a Nobel prize-winning economist

    • Steve June 27, 2011, 6:04 pm

      Andy @ Are you REALLY that stupid?

      Obviously you have put forth the correct question to reflect upon.

      Andy @ “. . . Does this make any sense to anyone?. . .” Great answers Rick and everyone else.

      Andy, I suggest exercise on a “stateside” hard product manufacturing startup with your own funds and your own 7 day a week labor, and 16 hours days, (family will usually work for free for 3 years including mom and dad) study, and then give us a update when 16 hour days and 7 day weeks are not enough.

      If the startup can get a loan, then I would like to hear it was more that 50% of what the business needed for success that would allow the starter to work a 40 hr 5 day week. By the way, all small business owners are thinking/dreaming business 24/7.

    • john June 27, 2011, 6:04 pm

      So Rick, I read the article you linked. Disappointing. Given your comment, “your “facts” are stripped of meaningful context,” I had expected some “real facts and meaningful content in context.” I guess, however, libertarian ideology suffices for some.

    • martin snell June 27, 2011, 6:29 pm

      Exactly.

      Many years ago I had a boss in Asia that used to pay me half my salary under the table in cash because he thought I had to pay too much tax. My marginal rate at the time was 10%!!!

      The moral of the story is that the rich (yes if you make more than $250K a year you are rich – since 1/2 of US households make less than 50K) will always bitch about taxes. However most businessmen are more concerned about “predicability”, or lack of uncertainty, than anything else. Give us a stable environment, even with higher taxes and we will invest. The gridlock, and incessant “insanity” on both sides in Washington is not helping.

    • Avocado June 27, 2011, 7:19 pm

      We cannot cut the budget deficit by cutting spending alone. With the current demographic trends in place we are not going to be able to grow out of it for at least another 10 years or more. So a bankrupt US government is preferable to raising taxes? Default and very high interest rates are preferable to higher taxes on the wealthiest members of society?

      Or are we better off with hyperinflation?

      Andy

  • Alex G June 27, 2011, 1:21 pm

    What does this mean for the USD and Gold? Tinkering with the prospect of default would be bad for the USD and remove the safe haven effect from Bonds, wouldn’t it? A reduced “risk” apetite in stocks would normally hurt PMs, but in this case would it be the same?

  • mario cavolo June 27, 2011, 9:10 am

    Hi Rick & All,

    I would throw in the following considerations, keeping in mind that most of us here believe there is some degree of coercion going on the various major market sectors…who, how and to what degree is a deeper question but meanwhile…

    1. With the end of QE2 Daboyz & friends have chosen an approach for the coming period – the common man of society and the markets needs to see lower crude and commodity prices. This will create, illusion or not, a sense of relief that supports stability in the stock markets. All three can’t continue going up together in a continuing risk-free for all party…

    2. Isn’t it reasonable that the markets would correct to and hold at the 11,000 – 11,500 range…? The overall business environment weakness is centered mostly in U.S. lower/middle class and real estate sector, but globally, growth is there to balance the weaknesses. Corporate economics, ie. the corporate biz environment, revenue, earnings, corporate cash on hand, other cash on the sidelines is not in a state of disaster. Someone knows otherwise? Certain sector display relative weakness, like U.S. manufacturing, & again, real estate. But other sectors like all related to smartphone/tablets/cloud and global development sectors have relative strength. PE’s are not outrageously high, or are they?

    3. So if 1250-1260 doesn’t hold for a bounce, 1210- 25 ish will (Down 11,500 ish) and if we end up with a full 38% fibonacci retrace over the next six months October, maybe that’s exactly what the market needs.

    4. Compared to the way things are done in the U.S., China’s govt involvement in the economy is clear, direct and unapologetic. As much as the Chinese tightening slows things down, they (China’s banks and political business leaders) will reverse the tightening and have plenty of room to do so as needed to stimulate again.

    China deciding to loosen again will greatly impact the economic dynamics and is a key inflection point to watch for because if they do, it will start the true overblown China bubble everyone has been talking about which we are in fact nowhere near yet. (same as what historically occurred in Taiwan, Malaysia, Japan – huge bubbles followed by bust because of a policy of sterilization followed by finally loosening and allowing the currency to devalue too late). However, keep in mind, such policy shift will cause continued inflation but come on gang, isn’t that historically proven to be an inevitable part of reality for a growing country? Don’t make the mistake of looking ONLY at low Asian salary levels, you must look at relative monthly cost of living budgets too.

    Example; millions of Chinese workers who now earn 2800rmb per month instead of 1500rmb per month, but are paying 600rmb per month on their monthly daily goods budget due to high inflation, are then still 700rmb per month better off than they were…! That’s a 30% cash flow improvement and at that level of net income, that Chinese person is putting that 700rmb per month in the bank! So I mean to say that the Chinese gov’t banking system will choose to loosen again and devalue and accept inflation before allowing the economy to have a hard, nasty landing.

    We must look at the situation globally; market sectors will show relative strength, such as tech led by smartphones/tablets/cloud. While other sectors in certain countries will be weak, such as U.S. manufacturing & real estate.

    So three important questions:

    Where then will relative strength be over the next 2 to 5 years?

    Where will relative weakness be; where should we position our assets defensively/short side to protect ourselves from the high potential crisis events due to Western sovereign insolvency?

    If Rick is right in the extreme and the whole thing goes to hell, then we should be short “x” and long “y” to survive, sustain or or hopefully even prosper knowing what’s coming. Its gotten way too complicated out there…

    Cheers, Mario