Gamesmanship in DC

August 1, 2011

Equities and bonds both opened up this morning as it appears, as most have expected, that the theater of the absurd in Washington may be coming to an end. Reports coming out of Washington are that House Republicans and President Obama have come to terms on a package that will extend the debt ceiling before a forced constraint on spending could cause a default on government debt. The deal is far short of the much ballyhooed $4 trillion in spending cuts originally discussed, however, in typical DC accounting gimmickry, the deal will still result in the budget deficit increasing over the next 10 years.

Neither side is happy with the deal, which means it is probably about as good as we will get for now. Democrats wanted more taxes and spending, Republicans a balanced budget amendment, and President Obama a bigger increase in the debt ceiling. It’s the last point that will make for interesting theater next year as Republicans’ second goal was to ensure the debt ceiling became an election year item while the President was trying to desperately avoid it. Ahh, the gamesmanship.

As I listened to President Obama posture during the course of this debt ceiling discussion, his call for "more revenue" and "balance" reminded me of something I wrote in my January 11, 2009 note http://weeklymarketnotes.blogspot.com/2009/01/january-11-2009-weekly-percentage.html.

President Elect Obama warned that without government steps the unemployment rate could reach double digits. The basic plan is to spend and then spend some more, then tax later. Mr. Obama said “only government can provide the short-term boost necessary to lift us from a recession this deep and severe.” He also plans to crack down on “reckless greed and risk-taking” on Wall Street, but ironically made no comment about cracking down on the “reckless greed and risk-taking” in the nation’s capital.

The yet to be inaugurated Obama was the most liberal Senator until the general election, and the cynic in me can’t help but think he’s pulling the old Texas Two-Step. First, ramp the size and scope of government dramatically, then raise taxes down the line to pay for it. A huge ramp in spending and taxes could never be accomplished during a more “normal” economic period; however, these are not normal times. Congressional rules requiring balancing spending and revenues (government code word for taxes) have been temporarily thrown out the window, but when/if things settle down, the tax and spend crowd is going to happily begin raising taxes and fees on everything and everybody that can produce.

While our elected officials dither and posture, the economy continues to show signs of weakening. GDP for the second quarter was announced on Friday and came in at 1.3% vs. expectations of 1.8%. Additionally, Q1 GDP suffered the largest downward revision I can remember, falling from an originally reported 1.9% to 0.4%. Personal consumption was much weaker than expected at 0.1% vs. expectations of 0.8%. Inflation played a key factor as nominal consumption rose 3.2%. It would appear that Main Street’s view of the economy has been much more accurate than Wall Street’s. The general public still believes we are in a recession, and with GDP measures this low, it appears we are on the brink.

The July ISM Manufacturing report came in this morning at 50.9 vs. 54.5. Remember that this is a diffusion index, and a measure above 50 signals growth while below 50 signals contraction. The markets reversed into the red after the release.

The Fiscal Times is reporting this morning that US commercial bank lending rose for three consecutive months after declining for two straight years. C&I lending increased at a 9.6% annual rate in the second quarter.

CMS surprised the markets after the close on Friday by finalizing an 11.1% reimbursement cut to nursing homes and long term care facilities (SNF). The cuts will total $3.9 billion. According to CMS, there was evidence that the nursing homes were getting unfair benefits for critical care after a pricing plan change enacted in 2010. There is no impact on non-profit nursing homes, only the for-profit operators. The new rules take effect October 1^st for FYE 2012. Stocks in the group are down between 15% and 55% this morning.

I know this is a bit late, but the NFL players and owners ended the lockout and are getting back to business as usual. One of the early losers of the new agreement is #1 pick Cam Newton, who received a four-year, fully guaranteed deal for $22 million. That typically would be considered a solid wage for someone just leaving college without a degree, however, the 2010 #1 pick, Sam Bradford, signed a deal worth $78 million. The difference is a new rookie salary cap that takes effect this year.

Have a great day

Ned