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This note was originally published October 03, 2012 at 07:46 in Early Look

“Milton Friedman reminded us that to spend is a tax.”

-Edward Prescott

On my flight to Denver last night I finally got through half of The 4% Solution. The aforementioned quote from Prescott (Professor of Economics at Arizona State) is representative of what you’ll find in the book - historical reminders that will get you to think.

Thinking, instead of reacting to the daily-double on Spanish bank bailout rumors, matters. History is littered with short-term policy decisions that resulted in long-term structural risks. History is also a guide for those of us who want a solution for a better future.

Not all “economist” ideas are dumb. Some of the simplest ones are just too hard for politicians to swallow. As Vernon Smith (Professor of Economics at Chapman University) suggests, “cutting government spending, as opposed to cutting interest rates… could be a critical step to recovering from a financial crisis” (The 4% Solution, page 50). Try getting Bernanke or Geithner to say that.

Back to the Global Macro Grind

Enough of the thinking already – if the Europeans print another $100-300B to bailout Spain, and Timmy backstops it with his friends from France via the IMF, the Eurocrats can blow that dough right down a rat-hole faster than you can, baby. Bull market.

After being down for 8 of the last 12 days (SPX closed up a marginal +0.09% as someone spiked AAPL into yesterday’s close) US Equity futures aren’t down yet this morning because the Europeans turned to Rumor On.

Risk off, Rumor On. That’s the political ticket. Or is it?

Tonight we’ll see if Romney can land a punch. If he can’t, I think he’s out cold. If I were him, I’d bring some music to Obama’s wide open economic chin.

Here’s where the US economy finds itself after a -69% GDP slowdown in 6 months to 1.26%. It’s a Bush/Obama Keynesian Trifecta:

  1. Rising Corporate Taxes (at 39.2% USA has the 2nd highest corporate tax rate (next to Japan) in the world (The 4% Solution, pg 48)
  2. Less than 50 days to the Fiscal Cliff (Pelosi and Geithner are going to save you from what they perpetuated, allegedly)
  3. Less than 1-3 months (depending on how they change the rules) on bonking the Debt Ceiling (again)

So, you can save yourself $50,000 a year sending your kid to Keynesian Economics School to come up with a solution like this:

  1. Cut Corporate Taxes to Canada’s levels (28%)
  2. Whack what it costs to employ everyone getting paid by Big Government in Washington, DC
  3. Fire Bernanke, replace him temporarily with Volcker, and bring back Strong Dollar

I’m not in Denver to run for office. But I think I could give Obama a good go on stage tonight if they let me. Americans are sick and tired of losing and being lied to. If you need a Canadian to be your Gladiator in this public economic Forum, I’m game.

Now that that’s off my chest, back to the market…

Last Wednesday, I said “Buyem!”, yesterday I wrote a Risk Manager note in the morning titled “Sellem!” What else do you expect me to do when watching this clown show? This is no longer about anything other than every man and woman fighting for what they have left.

Like I said on the Morning Client Call yesterday (every day at 830AM EST), “I’m just a man in a room” barking about this stuff. Whatever my ideas may be, they don’t superimpose systemic risk on the world’s consumption growth like Bernanke’s ideologies do.

Here are some multi-factor, multi-duration, risk management thoughts supporting why I sold stocks on green yesterday:

  1. US Dollar Index has held its long-term TAIL line of $78.11 support
  2. EUR/USD has failed, again, at its $1.31 TAIL risk line of resistance
  3. SPX vs VIX is breaking down (again) to the bear side, as VIX holds its long-term TAIL of 14-15 support
  4. SP500 snapped its immediate-term TRADE line of 1451; no support to 1430 on the same duration
  5. Russell2000 is back below its March 26th closing high of 846 (making lower long-term highs now)
  6. Bonds (UST 10yr 1.61%) continue to confirm that Growth and #EarningsSlowing matter more than Spanish rumors

If we don’t have the political spine to cut corporate taxes and government spending, at the same time, we’ll look more and more like Japan (or Spain). Don’t believe me? Give it 4 more years.

Sure, it will take some short-term commodity and stock market pain (like it did in the early 1980s and early 1990s) but, in return, we’ll get our hard earned currency back. That will drive oil prices lower, and US consumption higher.

 

Strong Dollar, Strong America – my name is Keith McCullough and I support this message.

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1770-1786, $109.07-112.86, $79.54-80.29, $1.27-1.29, 1.57%-1.64%, 829-846, and 1430-1448, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Spending Is A Tax - Chart of the Day

Spending Is A Tax - Virtual Portfolio