Week in Review

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Week in Review

08/06/2011

For the week 8/1-8/5

NOTE: At about 8:30 p.m., Friday, word came that S&P had downgraded the U.S. for the first time ever since awarding it a AAA credit rating back in 1941, to AA+, after warning on July 14 it would examine closely any deficit reduction package that was part of raising the debt ceiling. There is no way I can comment extensively on this late, but not unexpected development, plus I’ll be writing about market reaction next week anyway. For now, S&P said in its statement:

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

I do not have time to go back and tailor some of the following based on the above, not that I would anyway. I’ve been consistent where we were headed all along…and it wasn’t Shangri-La.

Europe, Washington and Wall Street

You having fun yet? Nothing like a 1200+ point drop in the Dow Jones in two weeks to get one’s attention. And, boy, that debt ceiling compromise was well received, wasn’t it? The Dow promptly lost 265 points the day it was signed in response. And forgive me if I remain a bit smug when it comes to Europe and its many problems, seeing as I have been all over the issue since spring 2010 and wrote on 1/1/11 that “the European debt crisis is with us well into 2012.”

But while from a prediction standpoint I have historically taken things one year at a time, such as my call for a 5% to 7% decline in the major U.S. averages this year, in recent months I have specifically been forecasting an outright Crash in 2012 on the order of 30% in a relatively short period of time. Days…not months. So did we start to see this the past two weeks instead?  No.

My call specifically concerns the U.S. debt crisis and I told you Congress would end up with a lousy compromise in raising the debt ceiling and already stated the $2 trillion in supposed debt reduction in no way would do the trick and that there will come a moment in time next year, after further putrid growth (some of us would take putrid the next 12 months at this point), when the realization will hit, with perhaps another awful budget deficit figure, and/or a failed Treasury auction, that our situation is beyond repair, thus triggering the Crash, which will be exacerbated by high-frequency trading, an example of which we saw this past week with the return of extreme volatility.

I also stated the last few months that if Congress and the president had shown some guts, a little Tom Coburnesque courage, and had come up with a credible $4 trillion deficit reduction plan then it would have been off to the races. Alas, this wasn’t to be as I told you would be the case.

I do just have to get this point out of the way. Some, such as economist Paul Krugman, whose recent New York Times op-ed is noted below, say we, including Europe, shouldn’t be reducing spending in the face of a possible double-dip recession. I say it’s about leadership, of which there is zero around the world these days. It’s about selling it to the public, something David Cameron has been attempting to do in the U.K. with mixed success thus far, and on which Barack Obama has been AWOL.

The other thing that Mr. Krugman and others of his ilk never mention is that if the world’s investors ever believed the U.S. was serious about confronting its deficits, money would come flooding in like never before. The U.S. economy would suffer for a quarter or two because of the shock of the pain, while others were laying the groundwork for the resurrection. You will never convince me otherwise. Alas, for now the argument is irrelevant.

As I go to post this week, the fury of the debt crisis in Europe may be lessening, on a strictly short-term basis, as Italy, along with Spain under attack all week as being the next targets in the rolling disaster movie, pledged to speed up austerity measures and reforms in exchange for European Central Bank help. Friday, around 1:00 p.m. New York / Wall Street time, Prime Minister Silvio Berlusconi announced his government would move budget cuts forward a year to balance the budget in 2013, ahead of an already aggressive 2014 schedule. The ECB had demanded such action and in return will now buy the sovereign debt of Italy, and probably Spain, as needed to stabilize the credit markets and allow these two to continue to access the private market for financing. A previous Berlusconi plan was ripped by ECB officials because the budget cuts didn’t come until after elections scheduled for 2013, which is similar to what our own Congress did, as I’ll get to shortly.

What was a big contributor to this week’s global contagion was that before Friday’s move by Italy, which helped the U.S. rally back some in the afternoon, the ECB was idiotically buying Portuguese and Irish debt, even though these two already have bailout plans of their own and to drive down their rates is rather meaningless because they no longer have to raise money in the market.

Plus, all week you had conflicting statements from the ECB and European Commission, with one blaming the other and various government officials contradicting each other.

EC chief Jose Manuel Barroso, for example, said the big Greek Bailout II compromise reached on July 21 was already a failure.

“It is clear that we are no longer managing a crisis just in the euro-area periphery,” he said, referring to Greece, Ireland and Portugal. “The 21st of July bold decisions on the Greek package and the increased flexibility of the (European Financial Stability Fund…EFSF) are not having their intended effect on the markets,” i.e., so much for August vacations.

I told you the new EFSF fund of 440 billion euros was woefully inadequate to deal with any crisis in Italy or Spain, it being barely sufficient for Greece, Ireland and Portugal, but the fact is as I write it will take weeks to even get the EFSF to the 440 billion level, unless Barroso is able to speed up the process. [I apologize ahead of time if action is taken on this aspect by the time you read the column, but all 17 eurozone governments and parliaments were supposed to ratify any new funding level.]

But not to make your head spin on this rather important stuff, a key part of the ECB’s rescue plan is to create another EFSF of 500 billion, or 940 billion euro collectively, which one would think might do the trick until, err, Halloween.

I mean this is a freakin’ mess. We’re still just on Europe, by the way, in case you’re losing track. This week you had European banks facing short-term funding issues (the U.S. had a smaller version of same), it’s clear Greece’s privatization program, critical to their bailout’s success, is going very poorly, as in who would pay top dollar for anything in that place these days?, and the economic data for some of Europe’s shining stars, like Germany, is looking weaker.

Instead, Germany’s industrial production in June unexpectedly declined over May. German business confidence fell more than forecast in July. The euro area purchasing managers index (PMI) for July was down to 50.4 from 52.0 in June, barely above the 50.0 dividing line between growth and contraction. The July PMI was 52.0 in Germany, 50.5 in France, 50.1 in Italy, 49.1 in the U.K., 48.2 in Ireland, 45.6 in Spain, and 45.2 in Greece, to cite a few. Britain’s growth forecast is down to 1.3% for 2011.

Where is the growth going to come from, especially given the austerity measures? What’s the catalyst? I mean I’d go over there and do some partying myself to help stimulate things, but I’m getting too old for that. Plus I have the same responsibilities here at home. [Just a little domestic vs. premium levity, friends.]

Oh, there’s so much to go through these days, it’s hard to keep up, but for now I’ll leave you with a few factoids. The Organization for Economic Cooperation and Development (OECD) said that if Greece’s new bailout and austerity plan works, “public debt will fall below 60% of GDP over the next two decades.”

Well this is absurd, and the OECD admits that, so it’s actual ‘prediction’ is that Greek debt will not fall to 100% of GDP until 2035! Hell, I’ll probably be dead by then, not to make it all about me.

And here’s another. U.S. bank and investment funds’ holdings in Italian and Spanish debt amount to $36.7 billion and $47.1 billion, respectively, which wouldn’t be the end of the world, taken in isolation, but “indirect holdings through derivatives and other financial contracts total an additional $232 billion and $131 billion.” [Washington Post]

How the heck do you know these figures are remotely accurate? What has been my main complaint about Europe, going back to my first musings on the housing bubble in Spain seven years ago? Transparency, or lack thereof.

For the record, the House passed the $2.4 trillion (or $2.1 trillion) debt ceiling compromise by a 269 to 161 vote. [95 Democrats and 66 Republicans said ‘Nay’.] In the Senate it sailed through 74 to 26 [7 Democrats (including an independent who votes Democrat) and 19 Republicans voting against.]

So what does this piece of crap actually do? Well for starters, those who are bitching and moaning it will help bring down the economy need to know there are basically zero budget cuts through 2012! The pain doesn’t start until 2013, if then, given the way Congress works (read some of the op-eds below). And as for the special panel of six congressional Republicans and six Democrats that is to recommend another round of cuts of $1.5 trillion, on top of the illusory initial $917 billion, these guys and gals are the ones with the tough work, yet we already know what’s going to happen. Republicans won’t budge on taxes or defense cuts, and Democrats won’t budge on protecting Medicare, Medicaid and Social Security.

The way it is supposed to work then if the panel doesn’t bring a proposal to the House and Senate by Thanksgiving on the $1.5 trillion, and/or Congress doesn’t approve what the panel lays out by Christmas, then $1.2 trillion in cuts across the board will be mandated, half from the Pentagon, with Medicare then taking a 2% hit of its own.

Now understand through this whole process to come that not only is President Obama going to calibrate every move he makes in keeping with November 2012, but 23 of 33 Democratic senate seats are up next year as well. And by the way, the “nuclear option,” the $1.2 trillion in automatic cuts, wouldn’t come into play until 2013 as well. 

Actually, the ones who really suffer in the interim are the states, who then pass on their problems to the municipalities. There will be tremendous uncertainty through this whole coming process as far as potential cuts in aid, on top of those already imposed, and no doubt state and local government will continue to shed jobs. As for the military, I have a lengthy discussion below.

But let’s all hope that one result of the debt ceiling debacle, and subsequent probable stalemate, could finally be a real push for tax reform. Simpson-Bowles had already issued a detailed proposal for both corporate and individual rates and there’s no reason their plan shouldn’t be a starting point. But is our president up to the task of shepherding it through Congress and explaining to the people how we’d all benefit? As Stephen Moore of the Wall Street Journal editorial board opined the other day, will Obama recognize that tax reform could save his presidency?

“Over lunch with columnists a month ago, Senate Majority Leader Harry Reid precisely predicted the course of the debt-limit debate. Democrats, he said, would not accept serious entitlement changes without accompanying tax increases. Republicans would not accept revenue increases. So an eventual agreement would be focused on domestic discretionary and defense cuts. Reid proceeded to tick off the categories of spending where the reductions would come – a list closely resembling the compromise.

“It was a demonstration of Reid’s underestimated skill as a legislative technician. It was also the description of a debt debate in Washington that remains unserious.

“The debt-limit deal, which strained and nearly snapped American politics, was the easy part. The compromise involved no reforms of Medicare or Social Security, and it had no tax increases. Once again, the president and Congress targeted discretionary spending – almost a third of the federal budget. Given the severity of previous discretionary spending cuts, this strategy will not work the next time around.

“The bargain addresses a liquidity problem; it does not resolve the debt crisis. Yet this exertion has left Democrats and Republicans winded and prostrate at the first mile of a marathon….

“Second, House Speaker John Boehner has been weakened by fractures in the Republican coalition….

“Third, the groundwork has not been laid for a serious debt debate, even after the presidential election….

“The problem is that an honest debate on controlling Medicare costs – a prerequisite for meaningful debt reduction – is uncomfortable for both parties. Democrats support price controls in an ever-more-repressive system that tends toward rationing. Republicans want to limit costs by increasing out-of-pocket costs for the middle class. Neither side has a political interest in preparing Americans for unavoidable pain. This challenge is at least an order of magnitude larger than anything Congress currently contemplates.

“So a debt deal is struck. But, after this spectacle, why would a credit rating agency, a foreign investor or an American voter have confidence in the ability of the American political system to confront the coming entitlement emergency?”

From the Wall Street Journal…Quarterly GDP growth after deep recessions:

I…..5.1
II….9.3
III…8.1
IV…8.5

I…...8.0
II…..7.1
III…3.9

III…1.7
IV…3.8

I…..3.9
II….3.8
III…2.5
IV…2.3

I…..0.4
II…1.3

[Sources: Commerce Dept., Bureau of Economic Analysis]

“I voted against (the debt ceiling compromise) because it does nothing to address the real drivers of our debt. It eliminates no program, consolidates no duplicative programs, cuts no tax earmarks and reforms no entitlement program. The specter of default or a credit downgrade will still hang over our economy after this deal becomes law.

“Politicians on both sides are misleading the country by calling a slowdown in the growth rate of new spending a ‘cut.’ Spending will increase at a time when real cuts are necessary to make us live within our means, repair our economy and preserve our credit rating.

“It is true that next year there will be a genuine cut of $7 billion when discretionary spending drops from $1.05 trillion to $1.043 trillion. But with our government borrowing $4.5 billion a day, that $7 billion is enough to fund the government for about 36 hours. And after our day and a half of restraint, spending will increase $830 billion over 10 years.”

And Coburn says of the trigger mechanism discussed above that is designed to reduce the deficit by at least $1.2 trillion, it “will never work. Congress will easily evade these caps. In the Senate, all it will take is 60 votes – the threshold for passing anything. Some have complained about defense cuts, but everyone in Washington knows those cuts can be avoided through supplemental or ‘emergency’ spending bills….

“The real debt crisis is not a debate that has been imposed on Washington by Tea Party activists. It is a crisis Washington has imposed on the American people through laziness, incompetence, dishonesty and political expediency. Politicians can talk all they want about how they did something to address the problem. But when the flaws of this plan become apparent, another change election will be coming.’

“For weeks, you could not fling a brick in Washington without hitting someone with a debt-reduction plan – unless you hit Obama, whose plan, which he intimated was terrifically brave, was never put on paper. In a prime-time spill of his usual applesauce about millionaires, billionaires and oil companies, he said, yet again, that justice demanded a ‘balanced’ solution – one involving new revenue. His whistle into the wind came after Washington’s most consequential Democrat, Harry Reid, proposed a revenue-free solution.

“By affirming liberalism’s lodestar – the principle that government’s grasp on national resources must constantly increase – Obama made himself a spectator in a Washington more conservative than it was during the Reagan presidency. By accepting, as he had no choice but to do, Congress’ resolution of the crisis, Obama annoyed liberals….

“Obama’s presidency may last 17 or 65 more months, but it has been irreversibly neutered by two historic blunders made at its outset. It defined itself by health-care reform most Americans did not desire, rather than by economic recovery. And it allowed, even encouraged, self-indulgent liberal majorities in Congress to create a stimulus that confirmed conservatism’s portrayal of liberalism as an undisciplined agglomeration of parochial appetites. This sterile stimulus discredited stimulus as a policy….

“The economy’s calamitous 0.8% growth in the first half of this year indicates that the already appalling deficit projections for coming years are much too optimistic. The debt increases caused by anemic growth and job creation may dwarf whatever debt reduction results from the process initiated by the debt-ceiling agreement. This may portend a vicious downward spiral as increased borrowing and the burden of debt service further suffocate America’s dynamism.

“America may be one-third of the way through a lost decade – or worse, toward a lost national identity. So, Republicans have their 2012 theme: ‘Is this the best we can do?’”

“And the winner is…Barack Obama. America’s flirtation with self-inflicted government bankruptcy may have revealed an unprecedented mutual loathing between politicians on the Left and the Right, but there is one point on which Washington’s chattering classes agree: the deal was disastrous for President Obama and progressive politics.

“From outside the self-referential hothouse of Washington and Wall Street, a very different conclusion can be drawn: the deal was a stroke of strategic genius creating the best possible spring-board for President Obama’s 2012 re-election campaign….

“Starting with the economics, the cuts have been misunderstood in four ways, all favorable to the White House. First, they are much smaller than they look.

“While $2.1 trillion sounds enormous – equivalent to some 15% of GDP – it is misleading. This is because American politicians have adopted a self-serving convention of cumulating budget reductions over 10-year periods. This bizarre method of accounting makes U.S. budget reforms sound ten times bigger than they are. Had the $2.1 trillion of cuts mandated by Congress occurred in Britain or mainland Europe, they would have been described as $210 billion annually, or between 1 and 1.5% of GDP….

“The second piece of good news is that the outcome is unlikely to damage the prospects of U.S. economic recovery – which would have wrecked Mr. Obama’s chances of re-election. The U.S. economy will experience nothing like the reversal of Keynesian fiscal stimulus now seen in Britain….

“A third reason for the U.S. Left to celebrate is that Republicans have reluctantly agreed to take half the mandated cuts from defense, while exempting many of the Democrats’ welfare and medical programs.

“Moreover, Mr. Obama’s one truly historic accomplishment – the creation of a universal healthcare system that had eluded all Democratic Presidents from Truman to Clinton – is secure against Republican attacks. The Tea Party has spent its capital in the default battle. Another such titanic struggle, over Republican attempts to ‘de-fund’ or financially sabotage ‘Obama-care,’ is hard to imagine.

“Finally, the Left’s complaints about an ‘unbalanced’ package, with all the fiscal retrenchment based on cuts and none from higher taxes, can easily be answered. President Bush’s tax cuts, introduced ‘temporarily’ in 2002 and repeatedly renewed for short periods, will expire in December 2012, when Obama will still be president. If, as is likely, an attempt is made to extend them, he will be able to veto them and generate a bigger increase in revenues than all the cuts combined….

“In short, the choice faced by voters in next year’s election will not be between Democrat national bankruptcy and Republican fiscal responsibility. It will be between two different ideals of society.

“Mr. Obama will present a vision in which adequate pensions and public services are funded by raising taxes on corporate jets, oil companies and rich bankers, each of which Republicans vetoed in the budget negotiations. Meanwhile, the Republican candidate will offer to cut pensions and healthcare so as to reduce taxes for millionaires.

“In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things.

“It’s not just that the threat of a double-dip recession has become very real. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.

“For two years, officials at the Federal Reserve, international organizations and, sad to say, within the Obama administration have insisted that the economy was on the mend. Every setback was attributed to temporary factors – It’s the Greeks! It’s the tsunami! – that would soon fade away. And the focus of policy turned from jobs and growth to the supposedly urgent issue of deficit reduction.

“Yes, officially the recession ended two years ago, and the economy did indeed pull out of a terrifying tailspin. But at no point has growth looked remotely adequate given the depth of the initial plunge. In particular, when employment falls as much as it did from 2007 to 2009, you need a lot of job growth to make up the lost ground. And that just hasn’t happened….

“Earlier this week, the word was that the Obama administration would ‘pivot’ to jobs now that the debt ceiling has been raised. But what that pivot would mean, as far as I can tell, was proposing some minor measures that would be more symbolic than substantive.   And, at this point, that kind of proposal would just make President Obama look ridiculous.

“The point is that it’s now time – long past time – to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing GOP.

“This might or might not work. But we already know what isn’t working: the economic policy of the past two years – and the millions of Americans who should have jobs, but don’t.”

As for Wall Street and the Economy, talk about carnage. It was the worst week since Nov. 2008 for stocks and made the previous week’s significant losses look like a tea party (pun intended).

Not only did the Dow Jones extend its two-week loss to 10%, but the S&P 500 dropped 7.2% in the last five days, Nasdaq lost 8.1%, and the S&P MidCap and Russell 2000 indexes I by habit have added down below since week one of this project of mine were both down 10%! In five days! Sacre bleu!

Ironically, Friday’s jobs report for July, slightly better than expected, was a non-factor when compared to Europe and other economic news earlier in the week, such as a June reading on personal consumption that showed a decline, ergo, we continue to deleverage and save, rather than spend; and consumer spending is still about 70% of economic activity so that makes it kind of important. A July reading on manufacturing, the national ISM figure, was just 50.9 when 55.0 was expected, another bad sign.

So the fact the economy added 117,000 jobs and the unemployment rate ticked down to 9.1% was practically treated with disdain after an initial pop, especially since the jobless rate fell because more Americans stopped looking.

But with all the turmoil in the global markets, now attention turns to the Federal Reserve, which just so happens to have a now critical policy meeting on Tuesday, Aug. 9. There is some talk of QE3, to which I’d ask, Why? And just what the heck can the Fed accomplish at this point given the already phenomenally low interest rates? Low interest rates haven’t been holding back a housing recovery; the inability to get a mortgage given the stricter credit standards is. Low interest rates haven’t led Corporate America to go on a hiring spree. Instead, fears over the uncertain regulatory environment, our nation’s deficits, and general uncertainty are holding CEOs back, and with good reason. One thing we do know about low interest rates. They have killed savers and the elderly.

Emerson Electric’s CEO put it best when commenting on his company’s uncertain outlook. U.S. and European governments are “dysfunctional,” and Washington is arranging the deck chairs on the Titanic.

Suddenly, within just the past two weeks with the market blow-up and the GDP report for the second quarter, as well as the steep downward revision for the first quarter’s activity, talk of a double-dip recession is at the forefront of discussion. Throughout 2011, the Federal Reserve and the nation’s top economists had all told us in looking ahead that we’d be swimming in 3%+ growth. Instead, we did about 0.8% in the first half and maybe we double that, if we’re lucky, in the second.

Street Bytes

--On Thursday, during the Dow’s 512-point rout, only 3 of the companies in the S&P 500 index rose. [Motorola Mobility Holdings, Vulcan Materials, and PG&E, though each remained down 15% to 25% for the year.]

While over 70% of companies in the S&P reporting earnings thus far have beaten expectations, 53% of companies in the Stoxx Europe 600 Index have reported earnings that missed analysts’ projections. That’s the most in data compiled by Bloomberg since 2006. 

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.29% 10-yr. 2.56% 30-yr. 3.85%

For all the bitching and moaning about U.S. debt, it returned 1.83% in July, about three times more than the rest of the global sovereign bond market, according to Bank of America Merrill Lynch data. The 10-year hit 2.40% this week before the late rally in stocks caused a shift back out of bonds. The 2-year hit a record low of 0.25% at one point. 

Incidentally, the 10-year average yield for the past decade is 4.05%.

--China’s leading credit agency downgraded U.S. sovereign debt on Wednesday, from A+ to A, after lowering it to A+ from AAA last November when the Fed decided to loosen monetary policy further.

Dagong Global Credit Rating Company Chairman Guan Jianzhong told CNN:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts. The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals. Our downgrade simply reflects reality.”

“Although the United States has basically avoided default, its sovereign debt problems remain unresolved. They have merely been pushed off, and there is a tendency for them to grow. This has cast a cloud over U.S. economic recovery, and also increased the risks and perils facing the world economy.”

--The Organization for Economic Cooperation and Development said consumer prices in its 34 member countries rose 3.1% in the 12 months to June after a 3.2% increase in the year to May. Food inflation, though, picked up, rising by 4% in June, vs. 3.9% in May.

--Stress in the money market fund arena ratcheted up to levels not seen since Sept. 2008, as for the seven days ending Tuesday, a net $103.2 billion was yanked from the funds, close to the record $120.4 billion outflow for the week ended 9/23/08.

--Interesting note by Eric Dash of the New York Times. When it comes to U.S. corporations, dropping from a AAA credit rating to AA hasn’t hurt most of them and the borrowing costs for being one notch below are higher by just a smidge (my term).

“In the early 1980s, around 60 companies had AAA credit. By 2000, the number of AAA companies was about 15. Today just four corporations – Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft – can claim those once-coveted three initials.” 

Many corporations came to view maintaining a AAA rating as a straitjacket. And investors ended up shrugging off the change.

--There was a funny story going around that until the debt ceiling was raised, the U.S. Treasury’s cash balance fell to $74 billion, less than the $76 billion that Apple now has buried on its campus.

--Alexis Flynn / Wall Street Journal…for us Peak Oil adherents…

“Most European major oil companies posted a surge in quarterly profits last week, but their results were overshadowed by a trend that continues to trouble Wall Street and corporate boardrooms: Nearly every major oil company reported year-to-year oil-and-gas output declines, often in the double digits.

“Big Oil is throwing huge resources at the problem with more open embrace of unconventional petroleum developments, high-risk exploration in frontier areas and corporate restructuring. But even if these strategies work in some cases, there is little doubt that anemic petroleum output signals a long-term challenge confronting the sector.”

--Central banks continue to ramp up their purchases of gold, another reason for the recent run-up to new highs. According to the World Gold Council, the U.S. has 74.7% of its reserves in gold, compared to 1.6% for China and 8.7% for India. South Korea announced it had recently doubled its stake, but its gold holdings are still only 0.7% of its foreign-exchange reserves.

--You know my yearlong bet on commodities, specifically the CRB Index? I have maintained that despite all the talk of the boom in commodities this year, the CRB would finish the year below its 12/31/10 close of 332.80. Even with gold rocketing to new highs, the CRB ended this week at 326.80. Once again, a long ways to go but when the CRB was at 370 earlier in the year, I stuck to my guns in the face of ridicule. My thesis was largely based on the role of speculators, a slowing economy reducing demand and better global harvests. The jury is still out on the last point. I’ll be in Iowa in about a week to get the perspective from there.

--Australia’s central bank is lowering its growth forecast from 4.25% to 3.25% in 2011, a rather significant reduction. The economy here shrank by 1.2% in the first three months. Of course the Aussies have been succeeding due to the commodities boom, but now domestic demand is slowing swiftly by some measures, with retail sales declining the last two months and home prices dropping for six months in a row. Australia’s manufacturing PMI in July also cratered to 43.3.

--China has been accused of orchestrating a five-year hacking operation that stole industrial and national secrets on an unprecedented scale, as reported by internet-security firm McAfee. While McAfee stopped short of naming China, the targets, such as the Olympic Committee before the 2008 games, make it rather obvious who the culprit was. Among the countless other targets were defense contractors in Britain and the U.S., as well as the United Nations. McAfee tracked the activity to a single computer server.

Companies are now paying close to $5.9 million a year to remedy attacks, up from $3.8 million last year, which suggests the issue just gets worse and worse.

--On the plus side of China, I’ve said as good an indicator of strength there is the data on gambling revenues in Macau, the world’s largest such market, which in July blew past expectations to post a 48.4% gain! Good lord! I feel better with my own investment in Fujian because of a figure like this. Speaking of that investment, it is holding its earnings call this coming Tuesday, a few days earlier than normal. The information on it will be quite telling and I’m nervous as to whether they will reaffirm guidance given the perceived slowdown. 

--Hong Kong billionaire Li Ka-shing, the man who predicted China’s 2008 stock market decline, said the mainland’s economy will avoid a hard landing.

“Every task that’s carried out in China these days has gone through careful consideration. I don’t think there’ll be a hard landing and I’m not concerned.”

China did report that a reading on the service sector for July was up more than expected, 59.6, but the PMI on manufacturing read 50.7, near the critical 50 line that independent strategists say China is already below.

[In reporting earnings that were solid, though guiding a little lower, Procter & Gamble had an interesting statement on the opportunity in China. While the average person in the U.S. spends $100 annually on the company’s products, people in China spend only about $3.]

--The jobless rate is expected to remain above 14% in Ireland in 2012, according to economists there; double the level of three years ago. In June it was 14.2%. And more people are leaving the country than at any time since 1989. I was there in ’89. It was bleak. [I’m headed back for a few days in early October and, especially since it won’t be tourist season, expect the same level of bleakness with gypsies camping out on the side of the road, a tell-tale sign of mega-distress.]

But, at least 2/3s of technology companies in Ireland are looking to hire in 2011.

Meanwhile, interesting story involving Irish tourism. The government says visitors from North America have increased 11.9% and from Britain 7.2%. But Ryanair CEO Michael O’Leary says this is impossible because airline seat capacity, including from mainland Europe, Britain and North America, is down across the board. I’d believe O’Leary.

--When you look at future entitlements and an aging population around the world, here’s some data out of Britain that is quite telling. Only 0.6% of those born in 1911 have reached 100, while babies born this year will have a 30% chance of living past 2111.

--U.S. retailers reported 4.4% growth in July same-store sales, which wasn’t bad, with Target up 4.1%, Macy’s up 5% and J.C. Penney ahead 3.3%. But Kohl’s were down 4.6% when a 3.4% rise was expected, not good.

High-end retailers, though, continued to rock. Saks’ same-store sales were up 16%, when 8.5% was expected, while Nordstrom’s advanced 6.6%.

However, when it comes to back-to-school sales the outlook is very iffy and it’s here where the decline in the stock market can have an immediate impact.

--July auto sales were as follows: Ford’s light-vehicle sales were up 5.9%, less than expected, GM’s climbed 7.6%, a slight beat, Toyota’s fell 23% and Honda’s dropped 28%, both owing to tsunami-related production disruptions. Nissan’s were up 2.7%, Kia Motors up 28.5% and Hyundai’s up 10%.

[Toyota remains optimistic about its post-March 11 recovery, while Honda suffered a big blow when Consumer Reports took the 2012 Honda Civic LX off its recommended list because it is flat out mediocre, has a cheap look and is generally lower quality across the board. Safety and fuel economy, however, are not issues.]

--General Motors reported second-quarter net of $2.5 billion, or $1.54 a share. Significantly it reported a profit in all regions globally and said it has $33.8 billion in cash.

In 2008 the automaker employed 263,000 people around the world. Today the total is 208,000. UAW workers in the U.S. are just 49,000…down from 62,000. GM operates 32 U.S. plants making 49 different cars and trucks, down from 47 plants and 86 models three years ago. [Wall Street Journal]

Good thing it has the cash it does, given the slowdown.

--Inflation Alert: Tolls on Hudson River crossings between New York & New Jersey could rise 50% as early as this fall.

--Kraft Foods is separating its businesses into a North American grocery business and a global snacks company. Essentially, Kraft mac and cheese, Oscar Mayer and Philly cream cheese on one side; Oreos, Cadbury and Trident on the other. 

--According to a U.N. study, commissioned by the Nigerian government, the nation’s Niger Delta is one of the most polluted places on Earth and it could take $1 billion and 30 years to clean up the mess after a half-century of oil spills.

“Pollution…has penetrated further and deeper than many may have supposed,” the report read.

How many oil spills? Try more than 7,000 from 1970 to 2000. The drinking water in at least ten communities contains high levels of carcinogens. So remind me to cross off the Niger Delta from my future travel plans.

--Egypt’s tourism ministry is claiming that traffic is picking up after an 80% drop in February at the height of the anti-regime protests, as in May it was 40% less. Israel saw a 25% increase in June.

Meanwhile, tourism in Syria, which reportedly made up 12% of its economy, has come to a screeching halt, while neighboring Lebanon has seen a decline of nearly 20%.

--In going through some old columns, I just have to note the following predictions:

Strategist Marc Faber: “The worst investment is in U.S. long-term bonds. This is a suicidal investment.”   Boy, that looks kind of stupid.

PIMCO’s Bill Gross: “The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that ‘old normal’ norms have returned. Not likely. There will be pain aplenty.” Not bad, Bill. Not bad at all.

And strategist Laszlo Birinyi was predicting the S&P 500 would rally to 2854 by Sept. 2013. It’s at 1199.

“Warren Buffett was on CNBC this week and said you ‘can’t stop this country.’

“Wrong, Warren. Debt can stop this country, just like debt stopped many an individual and corporation during the financial crisis and has stopped Greece and Ireland.”

--Toy giant Mattel was ordered to pay “bitter” rival MGA Entertainment Inc. more than $309 million in damages and fees to settle a long-running dispute over the billion-dollar Bratz doll line.

As reported by Andrea Chang of the Los Angeles Times:

“The explosive case pitted two Southland toy companies against each other: Mattel, the world’s No. 1 toy maker and owner of the Barbie empire, and MGA, a little-known player before it introduced Bratz in 2001. The multiethnic dolls known for their big heads, pouty lips and sexy clothing went on to be runaway hits among older girls and deeply cut into sales of Barbie.

“Mattel accused Bratz creator Carter Bryant, a former Barbie designer, of being in its employ when he came up with the idea for the dolls, and said he broke the terms of his ‘inventions agreement’ by taking it to MGA.”

The case nearly put MGA out of business. An initial trial found Mattel was right and awarded it $100 million in damages.

--Barclays Plc identified the number of cuts to be made at Britain’s second-largest bank by assets, about 3,000 jobs this year, including 1,400 given pink slips thus far.

Separately, while HSBC announced it was laying off 30,000 by 2013 the other day, it also said it would hire about 15,000 for positions in emerging markets by 2014.

--Sign of the times: Nassau County voters rejected a proposal to spend $400 million to overhaul the coliseum where the New York Islanders play as part of a multi-sport new complex, 57% to 43%. The Islanders’ lease ends in 2015, after which it seems certain they’ll move, possibly to neighboring Suffolk County, actually. The project would have meant a ton of construction jobs and relatively minimal tax increases but voters are in no mood today for such developments.

--After a fresh $800 million investment, the value of Twitter has jumped to $8 billion, more than double last year’s estimate. DST, a Russian internet investment firm, led the latest round of financing. I certainly would believe the Twitter story over something like Groupon.

--I have read three major market reviews of “Rise of the Planet of the Apes” and have never seen such a consensus. It’s terrific! There’s even a chance I might go to a movie theater the next few weeks to see it. [Andy Serkis, Gollum in “The Lord of the Rings,” is Caesar, the main character in “Apes.”]

--Sales of adult video-on-demand and pay-per-view services are down up to 10%. Too much free porn on the Internet these days, sports fans.

--Speaking of porn, Christie Hefner’s husband, William Marovitz, was accused by the SEC of insider trading on confidential developments inside Playboy Enterprises; tips gleaned from his wife, then CEO.

The SEC suit says Christie continually warned her husband not to trade on the information, as did Playboy’s general counsel. The couple is still married but she has erected a more stable Chinese wall in the middle of their bed.

Foreign Affairs

The Arab Spring

Back on 5/7/11, I wrote the following after returning from a trip to Paris, during which the SEALs took out bin Laden.

“Had I been in the States last Sunday night, my celebration would have been a muted one….

“I just pray President Obama continues to focus not just on the war on terror, but the really Big Picture. It is not only a time to roll-up al Qaeda for good (and on this he’s focused), but a time to press American principles and values throughout the Middle East and North Africa.

“Back in 1940, it was Winston Churchill vs. Evil and he emerged victorious. Today, the oppressed, including in places like Syria, need America’s leadership. We have an opportunity. We must grab it.”

Well, fast-forward three months and look at our missed opportunities, particularly in Syria. It is such a disaster and utter failure of leadership that the Syrian opposition has accused the international community of complicity in crimes against humanity after the UN Security Council failed to agree to a resolution condemning the Assad regime’s violent crackdown. The only thing Sec. of State Hillary Clinton is good at these days is giving us the latest death toll, now said to be 2,000, after over 200 were killed this week in Hama alone.

Oh, the Security Council issued a statement condemning Assad, but it doesn’t have the power, in theory at least, of a formal resolution. It’s pathetic. One leading activist told the Irish Independent: “History will judge this as a moment of shame for the UN. The international community is effectively encouraging Assad to continue massacring unarmed civilians.”

[Russia and China held up the UN resolution over concerns it would lead to further military adventurism.]

“Gunmen in plainclothes are randomly shooting people in the streets of the besieged Syrian city of Hama and families are burying their loved ones in gardens at home for fear of being killed themselves if they venture out to cemeteries, a resident says.”

The Syrian regime loves to employ snipers and they’ve been out in force throughout the uprising. Pure terror, the bastards.

And as for President Obama, he has spoken publicly on events here just twice…twice…since the rebellion began in March.

“There is disarray in Washington on the Middle East because the president has repeatedly shown that, deep down, he just doesn’t want the region to draw his energies away from addressing America’s domestic priorities. That may be defensible in a narrow, parochial way, but it also has been catastrophic at a moment of far-reaching transformations in the Arab world and beyond….

“The most troubling aspect of Obama’s performance has been his frigidness, exacerbated by indecision, when it comes to human freedom – the major issue of the day, and of the post-Cold War world. For a man supposed to embody the triumph of an African-American community long denied its freedom at home, Obama has been unusually reluctant to employ American power – military, ideological, and diplomatic – to assist those abroad denied their freedom. Whether it was his response to the demonstrations in Iran against the re-election of President Mahmoud Ahmadinejad, or the revolts in Tunisia, Egypt, Bahrain, Yemen, Syria, or even Libya, where the U.S. is involved in the NATO campaign, the president has been evasive and hypocritical, incapable of transcending his innate analytical detachment to seize the high emotions of the moment and shape them to his benefit.

“Morally, Obama’s behavior in the Middle East is objectionable; diplomatically, the president has been without inspiration, a leader who has prompted few genuinely profitable foreign policy openings. His three major speeches on the region – those in Ankara and Cairo, and his more recent effort at the State Department, in which he vowed that the United States would ‘promote reform across the region, and…support transitions to democracy’ – have become embarrassing reminders of how little the president has achieved. Even Obama’s urge to engage in a dialogue with the Muslim world was vacant, the whim of a college professor, a meaningless exercise in self-flagellation – for who but the U.S. alone, the president plainly implied, was responsible for the misunderstanding with the Muslim world?

“For a long time, the benchmark of foreign policy mediocrity was President Jimmy Carter’s administration. But Carter did manage some significant achievements, such as the Camp David treaty, the Panama Canal treaties, and SALT II. Three years into Barack Obama’s term, what legacy has he left, especially in the Middle East? He’s missed every major regional turning point, disappointing even ardent partisans. Obama may win re-election next year, but his is hardly a memorable presidency. It’s just that no one wants to admit it yet.”

Lebanon: This place continues to suffer from the unrest inside Syria as Lebanon takes on more  refugees, while Hizbullah wonders what to do about the plight of one of its key patrons, the other being Iran. This week the Special Tribunal for Lebanon that was set up to investigate the assassination of former Prime Minister Rafik Hariri in 2005, released the identities and photographs of four who have been indicted thus far, not that these men will ever stand trial. It was at least an encouraging move. Three of the four are part of a Hizbullah stronghold in south Beirut. The fourth has Hizbullah connections as well, though the accompanying STL statement didn’t identify Hizbullah by name.

Israel: The government gave permission to construct 900 homes in east Jerusalem, an act that would expand a settlement that was controversial two years ago when an announcement was made to build homes there during a visit by Vice President Joe Biden. Palestinians say the new development will cut off direct access between Palestinian neighborhoods in east Jerusalem and Bethlehem, thus creating yet another obstacle to any two-state solution, according to an Israeli peace activist. [Jerusalem Post]

Speaking of a two-state solution, Israeli Prime Minister Netanyahu is evidently willing to resume talks with the Palestinians that would focus on the 1967 boundaries, part of an effort to scuttle a Palestinian bid for UN recognition that is set for September in New York.

For its part, the European Union is trying to convince the Palestinians to bring a “softer” resolution to the General Assembly, one that would recognize the right of a Palestinian state without outright recognizing that such a state exists now. This would be similar to resolutions passed in the UN before.

Lastly, Prime Minister Netanyahu faced his biggest internal protest when hundreds of thousands of Israelis took to the streets to complain about rising costs as the middle class acts out its frustrations over the economy. Housing is a big issue as prices rose nearly 50% from 2008 to 2010, while rents increased by 20%, this as incomes were rising just 17% over the last five years.

Egypt:  The trial of former president Hosni Mubarak and his two sons began on Wednesday, as Mubarak appeared in a cage, on a hospital bed. Both judges and the top prosecutor owe their jobs to him and the proceedings are being broadcast live, so you can imagine what Egyptians are doing these things.   Mubarak is accused of corruption and ordering the killing of nearly 900 demonstrators who took to the streets during the 18-day uprising that led to his ouster.

“(The) timing and tenor of this proceeding suggests…a mob’s thirst for vengeance. The Mubaraks were served up to prosecutors by the interim military rulers in response to weeks of protest. The demonstrators, not irrationally, fear that the old regime wants to find a way to hang on. But a trial will do far less to guard against this risk than the rule of law and a proper democratic transition.

“The Mubaraks deserve what comes to them in an open and fair court. This prosecution is hasty, deeply political and distracting. If only everything else in Egypt moved so fast. There’s no date for an election, much less an electoral law, while the economy continues a post-revolutionary slide….

“Uprisings propelled by retribution, such as Iran’s bloody Islamic revolution in 1979, tend not to know how to shut themselves down….

“A common denominator to successful democracy stories is an orderly and consensus-driven transition. In this sense, the Mubarak case is symptomatic of the past six months in Egypt. An opaque military council has refused to hash out the rules and timetable to hand over power with the opposition through a formal process. Instead it throws the street a bone once in a while. Today that’s the despised Mubaraks. Tomorrow?”

Meanwhile, the level of Islamist attacks in the Sinai continues to pick up. 100 masked gunmen carrying flags with Islamist slogans attacked a police station. Six were killed in the firefight.

Iran: There were conflicting reports this week as to the state of Iran’s centrifuge program. Some say it is falling behind schedule in terms of installation of new versions that could speed up uranium enrichment. Others say Iran is indeed speeding things up. The Wall Street Journal says U.S. officials believe Iran would need 18 to 24 months to convert its stockpile of low-enriched uranium to weapons-grade material. I say, no one knows…period. I’m more interested right now in President Ahmadinejad’s seeming survival in terms of the leadership crisis in Tehran, and whether he is the country’s representative at the UN in September, which will speak volumes as to his future.

On the issue of the recently murdered academic who may or may not have ties to Iran’s nuclear program, an intelligence insider told Der Spiegel it was the work of Israel.

Libya: Rebels say a NATO air strike took out Moammar Gaddafi’s son, Khamis, who serves as one of the main commanders. If confirmed, it’s a big blow to the dictator.

And on the issue of the rebels’ military commander who was assassinated about ten days ago, it seems a group with Islamist tendencies did the job, raising concerns about discipline in the group (and a long-held fear among some in the West…as in, ‘Who are these guys?’)

Afghanistan: In the first seven months of the year, 328 foreign troops have been killed, vs. 404 for the same period last year. The Taliban is once again hinting it may want talks but this is a straw man no matter how you look at it. 360 Afghan civilians were killed by the Taliban in June, according to the UN.

[But this just in as I go to post…the Taliban shot down a NATO helicopter, killing all 37 on board; one of the worst single-day losses of life for coalition troops. Americans are among the casualties.]

Iraq: A watchdog U.S. government report says the security situation in Iraq is more dangerous than a year ago. The U.S. special inspector general for Iraq reconstruction described Iraq as “an extremely dangerous place to work.” At the same time, the Iraqi government is finally looking to hold talks with the U.S. about maintaining some level of force protection beyond the Dec. 31 deadline.

China: Japan ratcheted up the rhetoric when it comes to the perceived threat posed by China’s military, accusing Beijing of “assertiveness” while warning of ongoing tensions in the South China Sea. The language was contained in a Japanese government white paper. Beijing responded that Japan was deliberately exaggerating the threat.

Meanwhile, regarding the recent high-speed train crash, the Publicity Department of the Communist Party issued orders for newspaper and internet editors on Friday night (July 29) to cease reporting.

“After the serious rail traffic accident on July 23, overseas and domestic public opinions have become increasingly complicated. All local media, including newspapers, magazines and websites, must rapidly cool down the reports of the incident.

“[You] are not allowed to publish any reports or commentaries, except positive news or information released by the authorities.”

As the South China Morning Post (Hong Kong) noted, “The order was issued just hours before editors were due to send pages of special sections to mark the seventh day of the disaster for printing. The seventh day is the most important day of mourning for the dead, according to Chinese tradition.”

The China Business Journal, for example, was forced to scrap eight pages of material it had prepared.

And regarding my bit last time on the cash value placed on each life lost in the train disaster, due to public outrage over the original $75,000 or so figure, it was hiked to about $140,000.

Lastly, local officials blamed a deadly weekend attack in China’s restive Xinjiang region on “terrorists” trained in Pakistan.

North Korea: Two days of talks between the North and the U.S. represented the first such high-level official contact since December 2009. Further dialogue was to be held at a later date. A North Korean official said Pyongyang would resume six-party talks without preconditions, though the U.S. and South Korea were far less optimistic.

Separately, Japan has warned in the same above mentioned white paper that North Korea is continuing work on a medium-range missile that could put Japan and the U.S. territory of Guam within striking range. It is called Musudan and is intended to be fired from movable platforms.

Russia: Prime Minister Vladimir Putin, true to form, called the U.S. a “parasite” because of its huge debt load. Why thank you, Vlad. So kind of you. And heck of a “reset,” President Obama. Oh well, at least relations with President Medvedev* are more cordial. Putin’s comment was part of a speech wherein he said Russia should seek new reserve currencies to hedge against “a systemic malfunction” in the U.S. Then again, the following is certainly close to the truth.

“The (U.S.) is living in debt. It is not living within its means, shifting the weight of responsibility on other countries and in a way acting as a parasite.”

*Oops….this just in…on Friday, President Medvedev blasted the United States for its ongoing support of Georgia. Looks like we could be headed for “Reset II,” eh Mr. Obama?

On a different matter, nukes, Russia’s defense minister announced they would purchase as many as 120 additional short-range Iskander M missile firing units, these being nuclear capable. They have six, currently, and no timetable on when they hope to go to the 120 level. Like in the case of North Korea’s Musudan, the Iskander can be placed on a movable platform and accommodate two “quasi-ballistic” missiles that can travel 250 miles, max. [Global Security Newswire]

Lastly, Russia had its second disastrous boat accident in two weeks when a motorboat carrying partyers rammed into a moored barge on the Moscow River, near the Kremlin, killing at least nine. The previous accident in the Volga River killed 122. And an investigation into an incident last Friday, involving a separate cruise boat, revealed that crew members were “heavily drunk,” with local prosecutors adding “the sailors were so inebriated it took them three attempts to successfully moor the ship in the port after their voyage.” [Moscow Times]

Turkey: In the past 9 years or so, I have been to Istanbul twice and one of my favorite things to do is visit the military museum, a short walk from where I stay. No doubt, the military has a rich history here and I’ve described in the past the performance of the military band that plays at the museum. One of the more moving experiences I’ve had while traveling about. [Trust me; it’s powerful…if not a bit ‘martial’ in scope.]

But I wonder if the band still performs? The other day the top generals resigned in mass as Turkey’s civilian leadership has taken control, appointing four new commanders. The former top brass was upset over the ongoing investigations and prosecutions of officers accused of plotting to overthrow the government, up to 250 of them, this being a staple of Turkey’s history since Ataturk left the scene. [Big fan of Kemal, big fan.]

Civilian control of the military is a good thing as powerful Prime Minister Erdogan, who definitely sees himself in the mold of Ataturk, ensures that the military is subservient to the government and not the other way around. Civilian control of the armed forces is also a prerequisite to joining the European Union, though why Turkey would want to do that these days is a mystery.  Nonetheless, Erdogan bears close watching. Many still see him as a budding dictator.

Kosovo: Not for nothing but NATO deployed its reserves here after a week of violence between the government and minority Serbs.

Thailand: Yingluck Shinawatra was formally elected by parliament to become the country’s first female prime minister on Friday, a month after her party won a landslide election over a coalition backed by business elites and the military. Yingluck, who is rather cute, has zero political experience but is the younger sister of Thaksin Shinawatra, the prime minister ousted in the 2006 military coup. Another coup could yet be in the cards if she gets off to a poor start.

Random Musings

--According to a USA TODAY/Gallup poll, 46% of Americans said they disapproved of the debt ceiling bill, while 39% approved. In a New York Times/CBS News poll, 47% disapproved of Mr. Obama’s handling of the negotiations, 46% approved.

Additionally, the Times survey showed a record 82% of Americans now disapprove of the way Congress is handling its job – the most since the Times’ first began asking the question in 1977.

--Prior to the debt ceiling deal, President Obama’s approval rating hit a new low, 40%, according to the Gallup Daily tracking poll. On June 7 it was 50%.  In the Times/CBS survey, Obama’s approval rating was at 48%, basically in line with how he has been viewed the past year.

--As noted above, the Pentagon’s budget is going to be a prime focus of any deficit reduction. You know my opinion. Do not listen to those who say we can’t cut because of the threats we face around the world. That’s total bull. It’s both generals, looking to pad their future, post-Pentagon earnings power, as well as congressmen who have pet projects in their districts that will be sounding the alarm.

That said, of course, if you cut a project in Wichita, Kansas, that impacts jobs. But if the project or service isn’t warranted, it has to be cut!

But here’s what some are saying. Joint Chiefs of Staff Chairman Adm. Mike Mullen (who I like).

“I haven’t changed my view that the continually increasing debt is the biggest threat we have to our national security.”

Mullen warned a year ago that the ballooning debt posed a bigger threat than terrorists and rogue dictators operating in Afghanistan, Iraq, Iran, North Korea and other countries.

Back then, Mullen said, It is “so important that the economy move in the right direction” in order to pay for more military spending.

“The resources that our military uses are directly related to the health of our economy,” noting that projected future interest on the debt basically equals a year of Pentagon spending.

One item I sympathize with the Pentagon on is they have no idea yet on the fiscal 2012 budget, which starts Oct. 1. The Pentagon has its numbers in mind, but now it’s all up in the air. Initially the Pentagon was told to cut $400 billion over ten years, which despite their whining is nothing, especially given the drawdowns in Iraq and Afghanistan. 

But now the debt ceiling / deficit reduction deal is potentially reducing defense spending nearly $1 trillion over 10 years. One item definitely on the chopping block is increased health-care premiums for working-age military retirees. [Reminder, retirees pay $230 a person or $460 a family each year, along with small co-payments. And the fees haven’t gone up since 1995!]

Here’s what gets me about the debate. I won’t embarrass the reporter who wrote the following line, but it goes, “The proposed cuts would force critical weapons systems to be trimmed or eliminated…”

We hear from a general, working with defense contractors, that a weapons system is “critical” and every single one of us just believes it to be true! Some of them absolutely aren’t critical.

Now I’m not of the mindset of Democratic Cong. Barney Frank that the savings will come from pulling back our commitments overseas. The savings must come from unneeded weapons systems, a way over the top generous health-care plan, and the egregious system of contracts I have detailed in this space ad nauseam….to the tune of $hundreds of billions.

Lastly, the Joint Strike Fighter, or F-35, that is to replace an aging fleet of Harrier jets and protect troops in infantry assaults, costs $385 billion for 2,457 aircraft…$156 million per jet!!! Why?! Because someone said so, that’s why. Actually, the cost for the program was initially slated at $233 billion. How the hell can we let the contractors get away with this?!

Defense Secretary Leon Panetta, another good man, said major cuts to the defense budget would be “unacceptable.”

A story in the Washington Post notes the cuts “would require the department to shed civilian workers…blah blah blah.” 

And let me be clear to new readers, of which I have hundreds every week to replace the hundreds who are sick of me. Anyone doubting my support for the grunts, who deserve the very best in the field, doesn’t understand my history of support for our men and women in uniform, nor my appreciation for the history of our country and those who have defended it.

But it is time for Americans to stand up against the incredible amount of waste and fraud in the Pentagon, as well as demand that on issues like standard health-care (not ongoing care for our disabled veterans) retirees pay their fair share like the rest of us.

Or, as Joseph S. Nye Jr., a former assistant secretary of defense and currently professor at the Harvard Kennedy School put it in a New York Times op-ed:

“The alternatives we face today are not an untouchable defense budget or isolationism. A smart strategy for preserving America’s power and global role will depend on wisely tailoring our foreign policy to fit the cloth we have.”

--Oh, don’t you know Barack and Michelle Obama thought the president turning 50 on Thursday would be cause for nationwide celebration. Perhaps a little video screen action in Times Square, simulcast from Chicago, with local news stations in Gotham then showing throngs of Americans singing Happy Birthday by remote.

That might have been the thought even just a few months ago. If you doubt such a scenario, then you still don’t know Barack Obama.

Granted, no one really knows the guy, in the truest sense. As Peggy Noonan from her Wall Street Journal perch has best put it, we don’t know what is at the guy’s core. I mean you know what he wanted to be in terms of his administration; big government, big programs, America’s poor lionizing him.

But wait, one article I read said that on Wednesday, Obama did a video conference with supporters at about 1,000 house parties held in his honor across the country.

Republican National Committee Chairman Reince Priebus weighed in.

“The Fundraiser in Chief is back in Chicago, doing the thing that he’s really good at – and that’s raising money to save his job. The president, while he’s in love with the sound of his own voice, he’s not in love with following through on his promises.”

--The critical Iowa straw poll is but one week away, Aug. 13. Will Texas Gov. Rick Perry officially enter the race right before it, thus scuttling Michele Bachmann’s hopes of besting Mitt Romney? Some in Iowa say that expectations have risen so high for her, that anything but a win could send her candidacy reeling. And for former Minnesota Gov. Tim Pawlenty, it’s do-or-die time.

Bachmann’s two main bases of support are home-schoolers and evangelicals, the same groups that helped former Arkansas Gov. Mike Huckabee to an upset win in the caucuses in 2008.

--Sign of the Apocalypse, Part I: Saudi Arabia’s Prince Alwaleed bin Talal announced he was going to build the world’s tallest building in Jeddah, just two years after Dubai’s Burj Khalifa opened at a height of 2,717 feet. Prince Alwaleed’s tower would measure 3,281 feet (1,000 meters, conveniently). The tower will cost $1.23 billion and is to built by Bin Laden Group, the largest construction firm in Saudi Arabia that is owned by the family that distanced itself from Osama bin Laden.

It was in 1998 that Malaysia’s Petronas Towers in Kuala Lumpur passed the then Sears Tower in Chicago to be the world’s tallest building. Being the tallest doesn’t guarantee financial success. The Burj Khalifa supposedly isn’t doing well. In fact Dubai’s overall office vacancy rate is now 44%.

--Sign of the Apocalypse, Part II: Long-time readers will remember when I used to blast former Vice President Al Gore and others for their projects to give every schoolchild in Africa a computer. I used to retort that this was pure idiocy; that what mattered first and foremost was clean drinking water and good roads, from which all other progress flowed. [Time and time again I’ve been proven right.]

But now Bloomberg reports that people in India are spending more than half their monthly income on mobile phones for their children. Said one parent, “This is the Internet age. Facebook is there, all these things happen there now – they make friends, maybe they can even find jobs there.”

--I love foie gras, in moderation (I admit this is a messy segue from the above story), and anytime I am running through a European airport I pick some up. 

‘Tensions are mounting along the Franco-German border – the likes of which haven’t been seen since the Allies crossed the Rhine. Ministers are balking, diplomats are scurrying, threats are being issued. And all because of goose liver. And duck liver, too – the kind that is fattened to ten times its normal size through force-feeding, sold as golden-hued lobes at an exorbitant price, and magically transformed into delicate terrines and pates. In short, a battle has erupted over French foie gras.”

It seems this year’s Anuga FoodTec fair in Cologne banned foie gras, even as the FoodTec’s website notes the event “will be the world’s most important trade fair for the food and drink industry.”

But since the production of foie gras is banned in Germany, the fair has opted not to support it either.

Well, harrumph harrumph, the French trade minister summoned Germany’s ambassador to Paris and called on his government to respect European law “on free movement and nondiscrimination of goods,” as The Weekly Standard noted.

Others in the French government are speaking out, with one telling The Telegraph, “It’s unbelievable. It’s like banning German sausages in France.”

Animal rights activists such as Brigitte Bardot are telling the Germans not to cave. But this is funny, per The Weekly Standard.

“In all seriousness, you can’t blame the French for being outraged. For while Germany has banned foie gras production on its own soil because of animal-cruelty concerns, its citizens continue to buy rich and succulent foie gras from their French neighbors – and a lot of it. The Telegraph reports that Germans devour 170 tons of pate each year.”

--If you are a watcher of “Today” as I am each morning (just the first 20 minutes in my case), it’s interesting that the decision to let Ann Curry take over from Meredith Vieira has not gone well. The New York Post reports: “Sources close to the show said that NBC staffers have been ‘in disarray’ behind-the-scenes because second-place ‘Good Morning America’ has been closing the gap this month since Curry took over in June as co-host with Matt Lauer.”

Another source told the Post that NBC put itself in a box “because they basically had to let (Curry) anchor.”

“She comes across as having an affectation,” said another. “But she lobbied for the job, and she had to get it or she’d walk out the door,” said another industry observer. “Maybe that wouldn’t have been the worst thing. There are two shows waiting for her to show any signs of weakness.”

Yet another says NBC won’t pull the plug on her. Personally, I was hoping for Bar Refaeli, Sports Illustrated swimsuit model, but what do I know about such things?

--Yet another reason to stay away from New York City in September. Both President Obama and former President George W. Bush will visit New York for the 10th anniversary of Sept. 11. Neither is allowed to give a speech and instead will read pre-selected material, but it will shut down the city. For his part, Obama will also go to the Pentagon and Shanksville, Pa., which should make for a most moving day overall.

--In a speech Friday, July 29, urging Americans to email, call and tweet GOP Congressional leaders, President Obama asked us to support a bipartisan debt solution, whereupon he promptly lost 40,000 Twitter followers, according to the New York Daily News. Nonetheless, Republican Twitter accounts were indeed flooded with pleas for compromise.

--It was a nice moment to see Arizona Congresswoman Gabrielle Giffords’ return for the debt limit vote on Monday evening. That was a profile in courage, one of just a handful in Washington the past year. Tom Coburn, Paul Ryan…that’s about it.

--Finally, new images from the mountains of Mars provide further evidence of water. As noted in BBC News:

“A sequence of images from the Mars Reconnaissance Orbiter show many long, dark ‘tendrils’ a few meters wide.

“They emerge between rocky outcrops and flow hundreds of meters down steep slopes towards the plains below.

“They appear on hillsides warmed by the summer sun, flow around obstacles and sometimes split or merge, but when winter returns, the tendrils fade away.

“This suggests that they are made of thawing mud, say the researchers.”

We’re talking the results “are consistent with the presence of large and extensive underground salty lakes on Mars,” as one scientist put it.

Salty mud baths…the perfect spa treatment. The way things are going on Planet Earth these days, sign me up for the 10:00 a.m. Tuesday slot, assuming it’s available. Does Mars have Verizon FIOS yet?

Pray for the men and women of our armed forces, and all the fallen.

Gold closed at $1651
Oil, $86.88…lowest weekly close since February and now down on the year.

Returns for the week 8/1-8/5

Dow Jones -5.7% [11444]
S&P 500 -7.2% [1199]
S&P MidCap -10.5%
Russell 2000 -10.3%
Nasdaq -8.1% [2532]

Returns for the period 1/1/11-8/5/11

Dow Jones -1.1%
S&P 500 -4.6%
S&P MidCap -6.9%
Russell 2000 -8.8%
Nasdaq -4.5%

Bulls 46.3
Bears  24.7 [Source: Chartcraft / Investors Intelligence…this indicator comes out Wed. a.m., and represents the collective sentiment of newsletter writers through Tues. So on Tues., May 3, the bull / bear ratio was 54.9 / 16.5…and the S&P stood at 1356 and the Dow 12807. At least for this period in time, that’s how a contrarian indicator is supposed to work. It’s also a reminder that it takes time for it to play out…when it does work.]

*Dr. Bortrum has a new column up.

Have a great week. Really! Try to. I appreciate your support.

Brian Trumbore

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