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Who Are We Anyway?

07/29/2011

Back in Dallas, I had a good friend named Lloyd.  He was 44 years old when his father died.  After the funeral, his mother called the kids together to tell them a deep, dark family secret that she had promised not to reveal until her husband had passed.  The secret?  They were Jewish.  Apparently, they lived in an anti-Semitic area and wanted to protect the kids.  Lloyd didn’t care that he was Jewish, but he was badly shaken with the realization that he didn’t really know himself.

I’m having a similar feeling right now.  What do we know that we can really trust? 

Theoretically, interest rates will rise when the U.S. debt gets down-graded.  After all, lower quality deserves a higher yield.  But, where will all that money go, if not into Treasury bonds?  Sure, some will go into precious metals, artificially driving up those prices even more.  With volatility rising, with stocks falling, and with fear spreading like wildfire, it is very possible investors will decide a AA Treasury bond in a deep, liquid market like this one is still a very safe parking place.  This might actually cause short-term interest rates to decrease, not increase.

Theoretically, the Commerce Department will produce fairly reliable data.  This morning, they reduced their estimate of the first quarter of this year’s GDP growth from 2.0% to only 0.4%.  They further estimated second quarter growth at only 1.3%.  While not technically correct, the common definition of a recession is two consecutive quarters of negative growth.  We could be approaching that in this quarter.

Theoretically, debate among educated people would produce enlightenment.  Does anybody see that in Congress?  The Tea Party looks like it may drastically cut discretionary spending, without touching non-discretionary spending, which is the problem.  It is like watching the Army attacking the wrong town.  It is embarrassing!

I may track down my old friend Lloyd to see if he ever learned who he is.  For now, I know the market will over-react to the debt ceiling crisis, as it over-reacts to everything else.  I know we will survive and that there will be bargains in the near future.  This is not a TARP vote nor a Lehman failure.  But, it is embarrassing!

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