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How the Lack of Balance in US Government Is Affecting Your Portfolio


The scenario for the United States -- both in general economic terms as well as pure investments -- is a Democratic president with a Republican Congress.

I read the other day a fairly well-thought-out report that Ben Bernanke has almost the direct opposite problem as highly revered Paul Volcker faced in the late 1970s to early 1980s – potential economic deflation now versus inflation then. And with the Fed chairman's one tool in his toolbox – monetary policy – he has kept things moving away from disaster, even with the political clowns trying to trip him up at every turn and deflect blame from their own gross mismanagement. In effect, if Volcker is Fred Astaire, then Bernanke is Ginger Rogers – doing everything Paul had to do (with the full support of Congress), "backwards, and in high heels" – to quote Bob Thaves.

The GOP's ham-fisted approach in trying to blame everything on the other side is as clumsy, uncoordinated, and unbelievable as the Democrats trying the same tact as they (Obama included) continually exclaim that "we inherited…" – nobody cares or believes you, fix it! A key flaw in Team Elephant's blame strategy is that they continually forget the effectiveness of the bully-pulpit that the office of the president commands. President Obama is at the Conn and delivered a very well-reasoned explanation of his positions at a press conference last week that made him look like a moderate, and the GOP to be a bunch of anti-American crazies. Whether what he says is completely accurate or not, the reality is that he is in a better position to sway public opinion to his side. Apparently Bubba Clinton's coaching sessions are starting to bear fruit.

Perhaps this is because I'm an unreasonable whacko, but it seems to me that what would make the most sense would be for the GOP to use their House majority to pass their package, twist some Senate Democrat arms (remember, there are 23 up for reelection next year!) to pass the same deal, and make the president use his veto. They will NEVER win the game of "negotiating" in private and then trying to spin their version to the media. Nobody pays that much attention and the president can always own the message if nobody really knows what is said behind closed doors. He can't hide or spin much if he gets the veto pen out… And again, please realize, I didn't vote for President Obama, but I don't care (from an investment advisory standpoint) if he gets another term, as long as the other team captures the Senate, maintains the House majority, and brings BALANCE. As we know, the thinking that got us here (one party, "earmarking" rule in a two-party system for 10 years) is not the thinking that will get us out of here.

Again, sorry to slide off the investment road into the pigsty of politics once again, but this is what is going to drive the short-term emotions of our markets, likely through the elections next year, and potentially cause real problems for the much longer term if the "grown-ups" don't take charge soon. I love quotes, and the best I can find to describe the current issues we face and the ineffective maneuvering by our politicians is from Friedrich Nietzsche: "To predict the behavior of ordinary people in advance, you only have to assume that they will always try to escape a disagreeable situation with the smallest possible expenditure of intelligence." If anyone has something better to describe politics in America, please send it along so I may add it to my collection.

In summary, I feel that we will continue to grind up and over the wall of worry as we have for a couple of years in a longer term trend – things do continue to improve and the general complaint is that it's not fast enough and/or doesn't look like other recoveries. However, as I've painfully outlined in great detail in this piece, we will continue to be bombarded with emotion caused by political ramblings and mismanagement.

I'll make the assumption that just as with the current NFL lockout, that Congress is not actually stupid enough to allow a default, and that they will pass whatever compromise is hammered out over the next few weeks on the first try. If they don't, please remember the initial failed TARP vote back in 2008 and don't be surprised by that kind of extreme, short-term volatility.

As always, I welcome any questions or further discussion.
No positions in stocks mentioned.
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