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  • The U.S. Can’t Default On Its Debt… Right?

    The Treasury Secretary has warned that his agency will exhaust the “extraordinary measures” it has used to fund the government on October 17. On the Sunday talk shows, he warned of “catastrophic consequences” if Congress doesn’t raise the statutory debt ceiling by then. So, over the next nine days, you’ll be hearing ominous forecasts of what will happen if the US defaults on its nearly $17 trillion national debt, or even some of it. Sound familiar?

    Late last week, President Obama warned that he would not negotiate on the debt ceiling until Congress passes a “clean” continuing resolution to get the government funded and fully open again. Most Republicans are hanging onto their demand that the Obamacare mandate for individuals be delayed a year. If both sides hold out, increasing the debt ceiling could be tough.

    Somehow, these debt ceiling fights seem to get resolved at the very last minute, but the uncertainty can be brutal for the markets. In 2011, stocks lost around 19% of their value as this game of chicken played out. Some expect the current debt ceiling fight will be even more harrowing since Obama doesn’t have to worry about re-election.

    We’ll talk about all of this and more as we go along. Let’s begin by looking at the latest economic reports, or lack thereof, as was the case with last Friday’s unemployment report that was furloughed by the Obama administration, supposedly due to the government shutdown.

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  • European Debt Crisis Revisited - Implications For the US

    Today we take a fresh look at the European debt crisis which is worsening. Just over a month ago, EU leaders agreed on a second bailout loan for Greece to keep it from defaulting. That bailout loan had to be approved by all EU member nations, and several have refused to do so unless Greece can put up collateral. This has caused the bailout agreement to unravel and Germany's Chancellor Andrea Merkel is frantically trying to put it back together. If she fails, we could get another serious shock to the equity markets in the US.

    Meanwhile, the European Central Bank began buying huge chunks of government bonds from Italy and Spain to keep their credit markets functioning. Some argue that the ECB is not authorized to make such purchases but it is doing so anyway. It remains to be seen just how long the ECB can continue this large-scale quantitative easing. In any event, the European debt crisis is worsening, and I continue to believe that it will have more negative consequences for our markets here.

    A new CNN poll found that Americans' confidence in Congress is at a new low. For the first time ever, a majority of Americans want the bums in Washington voted out of office -- including their own Representatives in Congress. In past polls a majority wanted some members of Congress kicked out, but not their own Representatives. You'll find this story very interesting. Finally, I leave you today with a very good article written by Tony Blankley who offers President Obama some advice for his major speech on Thursday night.

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  • The European Debt Crisis is Spreading

    The debt crisis in Europe is intensifying with Italy and Spain falling into the mix, as I predicted in my July 19 E-Letter. You may recall that the European Union formed a bailout fund in June 2010, but as I will point out today, that fund is nowhere large enough to handle this crisis. Now even the European Central Bank has pledged to buy bonds from Italy and Spain, as well as the other PIIGS, but the ECB is also too small to vacuum up all of the troubled debt in Europe.

    In my July 19 letter, I wrote the following warning: "If this [Greek default] happens, I would expect the US stock markets to plunge again, perhaps as they did in 2008. And this could happen at any time." While I don't have a crystal ball, I had a strong sense that the markets and the investment public were all too focused on the debt ceiling battle and not on the deepening credit crisis in Europe. Unfortunately, my warning was right on the money.

    Equity markets around the world started falling severely last week, and yesterday's action saw the Dow Jones plunge by 635 points in what was one of the worst market days in history. Investors are selling stocks and equity mutual funds with abandon and are herding into Treasury funds and gold. This may prove to be a bad move since interest rates can only go so low, and gold has a long history of falling off a cliff whenever it turns down.

    The US stock markets moved higher this morning. The Federal Reserve met today and did NOT announce a new round of QE3 as was widely expected. As a result the stock markets all reversed sharply lower for a time. But as traders read that the Fed plans to keep short-term interest rates near zero until mid-2013, the markets reversed again to close sharply higher this afternoon. The wild market ride continues!

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