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Federal Reserve Readies for U.S. Debt Default

Jul 21, 2011, 10:22 am EDT

Reports emerged last night that the Federal Reserve is actively preparing for a government debt default. With negotiations over the debt ceiling still going nowhere, it’s clear that Fed Chairman Ben Bernanke and his fellow central bankers don’t want to be caught without a plan.

There are just 12 days to go until the Aug. 2 deadline set by the Treasury, when the government will run out of money and stop paying some bills. And, barring a last-minute compromise, the U.S. will face at least a credit downgrade and at worst the label of outright default on its debts.

Yes, it has gotten this bad. And the Fed is preparing for the worst. Read 

Despite Washington Budget Crisis, Earnings Will Lift Stocks

Jul 19, 2011, 12:13 pm EDT

Despite the contentious federal debt ceiling debate and the end of the Fed’s Quantitative Easing last month, yields on Treasury securities have fallen this month. In fact, PIMCO, the world’s largest bond manager, has actually increased its holdings of U.S. government debt. Stocks fell 2% last week but they have risen 4% in the last three weeks. With earnings season reaching a peak by late July, we could see a strong summer stock rally, despite all the frustrating political debates in Washington, DC.

Last week, the stock market recovered a bit late in the week, mostly responding to three favorable price indexes: On Wednesday, the Labor Department announced that the prices for imported goods declined in June by 0.5%, the first decline in a year. This decline was mostly due to lower crude oil prices. On Thursday, the Labor Department reported that the Producer Price Index (PPI) declined 0.4% in June, while the “core” rate (excluding food and energy), rose 0.3%. Then on Friday, the Labor Department reported that the Consumer Price Index (CPI) fell by 0.2% in June, even though the core rate rose 0.3%.

In summary, underlying (core) inflation is rising moderately while lower food and energy prices bring the overall price indexes down. Still, these very low rates of price changes are basically good for the market. Read 

A Modest Proposal to Fix the Debt Ceiling: Strategic Default

Jul 13, 2011, 12:01 am EDT
A Modest Proposal to Fix the Debt Ceiling: Strategic Default

It is a sad situation when hard-working CEOs and money managers who make this country great must watch a bloated federal budget waste our hard-earned money.

Millions of Americans claim they are old, sick or laid off – and, instead of working for an honest livelihood, employ all their time begging for a government handout. They drive up the national debt with their dependence, and are responsible for the current budget mess we are in.

I think it is agreed by all parties that this prodigious spending is deplorable. So amid the current debate over the debt ceiling, I feel compelled to offer my modest proposal to fix our free-spending ways: a strategic default on our debt. It’s a strategy employed by many homeowners underwater on their five-bedroom homes in Las Vegas, and it’s one we should put to use on a national scale. It’s time we put an end to criticism for our past behavior and not allow ourselves to be held hostage by creditors. Read 

Distracted Investors Could Miss Out on Summer Gains

Jul 5, 2011, 6:20 pm EDT

The stock market has seen a lot of distractions lately, with Greek riots being the biggest “hit” on TV last week. Since the Greek crisis has been “solved” for now, I expect TV producers will turn their attention to the United States, where we may see protests against cuts in various state and federal programs, made necessary by the fast-approaching deficit ceiling. Amid all this drama, it is important to remember that stocks will be more influenced by upcoming quarterly earnings reports than by placard-carrying protestors. Greek-Style Riots May Come to America This Summer

In Greece, the street protestors failed to oust Prime Minister George Papandreou, who survived a pivotal confidence vote in Parliament on Wednesday, 155 to 143. But the cost was steep: In order to fund high (up to 30%) interest payments, some of Greece’s “crown jewels” will go on sale — including the postal bank, the national railway, the national lottery, Greek Telecom, major ports and other prime real estate.

On Thursday, a team of European Union (EU) and International Monetary Fund (IMF) inspectors reached a deal to provide 12 billion euros ($17 billion) in aid to Greece in exchange for even more budget cuts, plus a broadening of the income tax threshold for people that make as little as 8,000 euros ($11,400). These painful cuts and tax increases are expected to be approved by the Greek Parliament early this week. Read