The R Letter: More Phony Debt Debate

Three groups spend other people's money: children, thieves, politicians. All three need supervision. - Dick Armey

The phony debt debate is losing its purity - meaning that it is less about a longer term plan to attend to the debt and more about appeasing the phony credit rating agencies.

Why is everything so phony?

First the credit rating agencies: they - meaning Standard & Poor's, Moody's, and Fitch - routinely rated junk debt as AAA, the same ratings given to Treasury bills, during the last decade. Since many pension and mutual funds can only buy investment grade, they heavily favored this junk because they paid a higher interest and were rated as safe as Treasuries. That infected the entire system. They are a big reason why many senior citizens have to work cashier at the local McDonald's. When they testified in front of Congress about the process in which banks and brokerages were able to essentially "purchase" a AAA rating, they quipped a "just an opinion" disclaimer and followed it up with, "Oops, sorry." This is not the first time. They were exposed during the Enron scandal for their complicity in rating Enron's junk. And yet nothing regarding them has changed.

And the phony debt debate? Last week, I mentioned that House Republicans routinely voted to raise the debt ceiling under Bush 43, and have routinely voted "no" during Obama's tenure. The reason given on TV is that new Tea Party lawmakers have changed the culture on Capitol Hill, but when the majority of the members voting are still the same and entrenched, you really have to credit partisan politics.

So things are moving forward on a deal that will raise the debt ceiling. But is it a real deal? The proposal is to raise the debt ceiling $500 billion and have a concrete plan to deal with the debt in six months. So the plan really is: kicked the can down the road again - only this time with a time table - and maybe we can hammer out a real deal then.

Will the promise of a plan really appease the credit ratings agencies? Who knows. Given the shadiness of the ratings agencies, there is another way to avoid a downgrade: All Congress has to do is threaten their oligopoly status and the ratings agencies will go away with the downgrade threats. Did anybody think of that?

The Obama - Reagan Comparison

Some Republican voices compare Obama to Carter, and feel that Obama should take a Reaganesque stance on the economy. The term "tax-and-spend liberal" also gets batted about. As the two graphs below will show, both parties like to spend. This first graph shows the growth of the debt ceiling from Carter to Obama. The figure for Obama is current, not the proposed one in Congress.

Looks like Obama is running up the tab. However, everything in the financial world is percentage-based. Interest rates, treasury bills, mortgage rates, credit card rates, etc. All percentages. So now check out this next graph showing the debt ceiling growth in percentage terms.

Compared to Reagan, what Obama has done is just a drop in the bucket. It should be noted that Carter and Bush 41 were one term presidents. If they served two terms, doubling those figures would give a rough estimation of the heights they would have reached.

So don't be fooled by the finger-pointing from Reid, Pelosi, McConnell, Boehner, and Cantor. They sang a different tune for years now. Both parties are guilty. Hold your representatives' feet to the fire and demand they answer for it on Election Day.

Stock Market Stuff

Blowout earnings from Apple (AAPL) had the stock knocking up against $400. The run up to $400 caught a lot of people by surprise and are now hoping for a pullback to get into the stock. However, AAPL has had earnings pops before and they rarely were followed by pullbacks. If you're looking to get into AAPL, you might want to take a little stock right here and now. If it pulls back 10%, then you get substantially average in. If it doesn't pull back, then you can at least ride some profits higher. ... Anyone noticing that during this bounce, when the market goes up, gold (GLD) and silver (SLV) go down. When the market is down - even intraday - gold and silver go up? Spells out the market's view of gold and silver, does it not? With what's happening here with the debt ceiling and the European's ongoing plans with a structured Greek default, investors flock to gold and silver when they want to take risk off the table. Before, it was enough just to exchange your stocks for cash. Now it's exchange your stocks for precious metals. Because of that, you can't view gold and silver as in a bubble. Gold and silver are the new currencies. ...

Bottom Line: If you didn't get in on the bounce, then you missed at least half of the move. So if you still want a piece of this market, consider buying small.

Stuff That May Only Interest Me

Google of course makes its money from advertising - 97% of their revenue in fact. Everyone knows how Google works. You type in keywords, and Google returns a list of results for you to click on. Google holds an auction called AdWords for companies to bid on keywords. The results are on this location. The number one keyword is "Insurance" which nets Google $54.91 per click. Rounding out the top ten are: loans, mortgage, attorney, credit, lawyer, donate, hosting, degree, and claim. These words are not surprising, for if they were in the Yellow Pages, these would probably be the thickest sections. What was surprising was #20: "Cord Blood" - netting $27.80 per click. Cord blood?!? What is "cord blood"?!? I could tell you, but you'll have to Google it yourself to find out. The only thing I'll hint is that it is consistent with the theme of the other keywords - people would type in these words for help. ... With the debt ceiling issue being what it is, the Chinese are expressing concerns about their investment in our Treasury bills. They feel that we are purposely debasing our currency. Well, I feel that Chinese publicly-traded companies purposely cook the books and defraud American investors. Tit for tat. ... Kim Kardashian is suing Old Navy for using a look-a-like to promote its products. Kardashian, whose sex tape propelled her to stardom, feels that people will confuse the look-a-like with her and think that she endorses Old Navy apparel. On the flipside, Graceland has yet to sue Las Vegas. I'm sure they're watching intently. The lawsuit, not the sex tape. ... On a slow day, news channels are still calling up Donald Trump to ask him what he thinks. It's like watching a bad movie for the umpteenth time at 2 AM. You keep praying for a commercial interruption. ... Borders is now liquidating its stores. I popped in Friday to use up my gift card. All sales final. I grabbed a book on American Presidents and a Simon R Green novel. I then cursed myself when I got home, browsed online, and found the same book cheaper - despite the discount. ... A new study on couples from the United States, Brazil, Germany, Japan and Spain concludes that cuddling and caressing are more important to men than women. Frequent kissing, greater intimacy, leads to a happier relationship for men as time goes on. So you see ladies, men are deep, too. ... The state of California has authorized school districts to negotiate up to seven additional furlough days for the coming school year. Currently, the law allows for five without deduction in revenues to school districts. If that occured in San Diego, then the traditional 2011-12 school year would end on 1 June during the Memorial Day shortened week. All staff, teachers included, would take an additional paycut since they are seasonal workers (teachers do not get vacation pay). Current paycut is 2.7%. That will increase to 6.5%. ... Nationally, school budget cuts have lead to special fees and taxes on families to help sustain extracurricular activities. Thus back to school costs will certainly rise for families when September comes around. ... US unemployment rate is 9.2%. California's is at 11.8%, second worst in the nation (Nevada, 12.4%). Jobs continue to wither. When will lawmakers deal with it? ... If you're detoxing like me, you probably aren't barhopping. So what to do if you're jonesing for a drink with friends? Go virtual on Barspace. With Barspace, you can see the action through live cameras and determine if the atmosphere is right for you before going. Or check out the meat market if you're single (or not). Since I'm a teacher and getting caught drinking on TV could possibly be career-ending, I need to first see if my establishment ISN'T broadcasting before going. ... RIP Amy Winehouse.

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