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  • Upcoming Debt Ceiling Fight Could Get Really Ugly

    Today we will focus initially on the upcoming battle over whether to increase the US debt ceiling. The government reached the current statutory debt limit of $18.1 trillion back in March. Since then, the Treasury has been paying the nation's bills by using so-called "extraordinary measures." But the Treasury warned recently that such funding will be exhausted by November 5, and that means another debt ceiling battle will play out between now and then.

    While we've seen this movie before and know how it will ultimately end, the political battle in the coming weeks could get really ugly, especially now that House Speaker John Boehner has announced that he is stepping down soon. With a lack of leadership in the House, this year's debt limit circus could be especially unsettling for the stock and bond markets.

    Next, we turn to the question of whether a recession is likely just ahead. While the economy grew by a better than expected 3.9% in the 2Q, more and more forecasters are downgrading their outlook for the second half of this year. The number expecting a recession in the months ahead rose sharply in a survey by Bloomberg at the beginning of this month. The good news is that about 85% of economists surveyed do not expect a recession to begin this year.

    As usual these days, there's a lot to think about - so let's get started.

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  • Consumer Confidence Plunging – Recession Ahead?

    The stalemate in Washington continues, the government remains in partial shutdown and the debt ceiling looms on Thursday. A bipartisan deal to fund the government until January 15 and raise the debt limit until early February is working its way through the Senate and could be voted on later today or tomorrow. It is unlikely that the Senate bill would pass in the House, which is reportedly working on yet another bill (see link below) that is unlikely to pass in the Senate.

    The mindless gridlock continues and the Treasury Department warns that it will run out of “extraordinary measures” by the end of this week and the statutory debt ceiling will be eclipsed on Thursday or Friday. While this will technically be a “default,” the Treasury will continue to collect enough revenue each day to pay the interest on all of our outstanding debt. Still, things are likely to get increasingly crazy in the next few days.

    As a result of all the hype and anguish over the shutdown and the debt ceiling, consumer confidence has plunged since the beginning of this month. The confidence index, as measured by Gallup, has declined by the most since September 2008 when Lehman Brothers went bankrupt at the height of the financial crisis. And it continues to fall. This raises fears that consumer spending will drop significantly and a recession could unfold just ahead.

    Following that discussion, we’ll look at some interesting facts surrounding our national debt which now stands at a mind-boggling $16.965 trillion. Since our national debt is Issue #1 on the minds of most Americans, the discussion below should be very timely.

    Finally, today’s E-Letter will print longer than usual because we have lots of charts and graphs.

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  • Gun Control & How To Play Upcoming Debt Battles

    As you probably know, the Republican leadership in the House decided last Friday to cave in to Obama on the debt ceiling issue (ie – no spending cuts). This week, they hope to pass a temporary extension of the debt ceiling until April 15, during which time they hope the Senate will adopt a new federal budget for the first time in almost four years.

    If somehow the Senate passes a new budget, and the House approves it, then it’s possible that all three upcoming debt battles could go away. I would NOT count on that! I don’t think Senate Majority Leader Harry Reid will spearhead a drive to pass a new budget and if not, all three debt battles could still play out.

    If I am right, then a lot of market turmoil still lies ahead over the next few months. Near the end of last week’s E-Letter, I alluded to an investment strategy that could position many of you to take advantage of the debt battles we will likely face just ahead. I’ll get specific today.

    However, before we get to that discussion of how to potentially take advantage of the upcoming debt battles, I have some commentary on President Obama’s sweeping gun control initiatives that he announced last week, in the wake of the Sandy Hook Elementary School massacre on December 14. While we expected that Obama would seize upon the Sandy Hook tragedy to put forth new gun control laws, we did not know that they would be the most wide-sweeping regulations in more than a generation.

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  • The Optimists’ Case for the Economy

    Over the past few months, I have presented a lot of information discussing why this economic recovery is so weak. As noted last week, new data confirms that this recovery is the weakest since WWII, if not of all time. Yet despite all the recent disappointing data, there are still some prominent economic optimists out there, including The Bank Credit Analyst. These forecasters still believe that the so-called "soft patch" during the first half of this year was the worst of it, and that growth will be better in the second half of this year. I will summarize this more optimistic outlook below.

    Before we get to that, I will review the latest economic reports. There were actually a few bright spots of late, but they were definitely overshadowed by last Friday's very disappointing unemployment report. We end up today by revisiting the debt ceiling debate. Republicans, Democrats and President Obama remain stalemated as this is written. Obama is insisting on $1 trillion in tax increases in return for cutting spending. Republicans are so far holding firm on no tax increases. The government runs out of money just three weeks from today on August 2.

    I am still somewhat optimistic that a debt ceiling agreement will be accomplished before the August 2 deadline for default, but both sides have their heels dug in as this is written. Whatever happens, the next three weeks will be very interesting, and the investment markets could go ballistic if a deal is not reached.

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  • Debt Ceiling Battle’s Predictable Outcome

    A political battle is looming over raising the federal debt ceiling limit which we will hit over the coming weeks. The media warns that we could face a massive government shutdown if an agreement is not reached to raise the debt ceiling. This is nothing new, and the truth is that the debt ceiling will be increased, as always, but probably not until the last minute.

    The Republicans are hoping to extract more federal spending cuts in order to agree to raising the debt ceiling, and I predict that they will get very little in the way of meaningful cuts. Some Democrats are calling for new tax increases before increasing the debt ceiling, but this is just a bargaining ploy. Truth is, it's all politics as usual on both sides and in the end, the debt ceiling will be increased - bank on it. I suggest not paying much attention as this plays out.

    The debt ceiling political fight that will play out over the coming weeks will once again miss the point. Our national debt is spiraling out of control, and raising the debt ceiling limit does nothing to correct this problem. It just kicks the can further down the road. Frankly, I wonder if it is possible to construct a viable plan to reverse our out-of-control spending at this point. Most of our leaders in Washington are drunk on increasing federal spending.

    At some point, unfortunately, the bond market will put a violent end to this. I have written about this before, but this week, I put this discussion into a more detailed perspective. The bond market may well send interest rates soaring once again when it become clear that our politicians refuse to cut the exploding size of government spending and deficits. Not a pleasant topic to consider, but we must keep focused on it.

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