November Surprises?

While pundits like Dick Morris are wary of an "October surprise," voters and investors should be aware of three possible scenarios in November. One involves market volatility, one a political party civil war, and the other deals with civil unrest. First, let me provide a little back story about the first possible surprise.

It's been strangely calm in financial markets coming up to the election. Crude oil, gasoline and precious metals have all gone down... the Dow has stayed above 13,000... and it's been very quiet on the European financial front. This hasn't been because of any change in economic fundamentals. Many European governments and banks are still over-leveraged, and still need to be bailed out (again). German Finance Minister Wolfgang Schuable warns that the worst economic events are yet to come with the Euro crisis. 

Ditto for the United States, with an official national debt of over $16 trillion - plus unfunded liabilities of anywhere from $50 to over $200 trillion.

It's not a matter of if the global financial system collapses, but when. The laws of mathematics are as solid as the law of gravity. Doesn't matter if you believe in it or not, it still works every time. Printing money, borrowing and spending can solve the problem in the short-term, but it's like trying to keep a beach ball below the water - inevitably, it'll pop back up again.

That's what I see when the election is over, and the short-term financial "patches" don't (or can't) work anymore.

Here's November Surprise #1: Increased volatility in world stock and commodity markets.

If Romney gets elected, the US stock market will probably go up in the short-term. But that still doesn't change the ugly fundamentals a Romney Administration will deal with the next four years. No matter who gets elected President, it will be tough financial and political sledding. Democrats will want to maintain the welfare state, Republicans the warfare state.

The President and Congress know that any real cuts in federal spending will cause short-term economic pain, and political hari-kari. Voters will be angry because their federal ox has been gored, and they'll be open to attacks that he or she didn't "care" because they cut spending and programs.

We'll probably see Washington continue to "kick the can" down the road as far as possible, until we hit a currency or cash flow "crisis wall" that will force Congress and the President to make these tough decisions.

I believe that European banks and governments have been kept quiet this election season, because they've gotten financial assistance from the IMF, Federal Reserve and/or other institutions to stay solvent. The day of financial reckoning is coming closer, and the massive amount of debt will have to be repaid or defaulted upon.

This debt and derivatives de-leveraging will result in much higher volatility in world financial markets.

However, if Obama wins re-election, this will lead to November Surprise #2:

A civil war within the Republican party.

It's no secret the Establishment never really liked Ron Paul or his libertarian supporters. Reports of vote rigging in Iowa, Maine and other states - not to mention the fiasco at the national convention in Tampa - left a lot of folks unhappy with the formerly Grand Old Party.

If the Republican nominee can't beat a President with the worst economic performance since Jimmy Carter, that would be pathetic. Limited-government and 'small L' libertarians will escalate their political uprising against party leadership.

And if you thought the natives were restless before, just wait if the Establishment's choice for President loses again.

This will be the beginning of the end for the Republican Party. Even a Romney victory will only delay the inevitable. I don't believe that a big-government, Rockefeller Republican from Massachusetts will be serious about limiting the size, scope or spending at the federal level. Once enough Republicans wake up to the fact that he's doing the same thing as Bush and Obama did, the political jig will be up.

For the last few years, the GOP has been a loosely bound coalition of imperialistic war hawks, social conservatives and libertarians. While there's some overlap between these factions, many folks in each group tolerate each other only for political convenience. Under the surface, there's real animosity between the limited-government faction and the rest of the party.

Ron Paul Republicans played nice because they wanted the Congressman to get nominated, and now the Establishment is pleading with the Ron Paul folks to support Romney. If the Establishment thinks that Ron Paul supporters will come back and lick their political boots, they've got another thing coming.

While older Republicans look down upon younger, more liberty-minded activists, they do so at their own risk. The Establishment needs limited-government and libertarian voters to maintain power. Libertarian voters haven't gotten any support from the Establishment, so why should they help out or stick around? When the GOP eventually breaks up, social conservatives will probably migrate to the Constitution Party... limited-government activists to the Libertarian Party... anarcho-capitalists and frustrated activists will probably re-register Unaffiliated - or drop out of politics altogether.
 
However, if Romney does manage to get elected (as I think he will, by a small margin), that could lead to November Surprise #3:

Civil unrest in poor, urban areas around the country. Although there's little difference between Romney and Obama, the perception is that Romney will cut federal spending and programs. People who are dependent on those entitlements will be angry because they may lose that support, and the country's first black President has been defeated.

The U.S. is more polarized and divided than any time in history, with maybe the exception of the Civil War. Americans are frustrated because of a stagnant economy and tight job market. They're worried about their futures because most of them don't understand the economic causes (or solutions) to America's problems.

Unfortunately, a lot of Americans - both Republican and Democrat - have been conditioned to believe that elected officials have magical powers to overcome laws of economics, mathematics and finance. Some "true believers" buy into their candidate's rhetoric, some voters will vote for their party's candidate no matter what, and some citizens just want someone to believe in.

They understand very little about what causes booms and busts, and what it takes for a country to make its way back from an economic recession or depression. Too many Americans have put their trust in charming personalities, instead of sound financial principles.

I'll add a fourth November Surprise: Americans of all political stripes will be disappointed with President Romney, and a still-sluggish economy between 2014 and 2016. 

I know this may sound like heresy to loyal Republicans. However, it will take several years - and maybe a decade or more - before the financial excesses get cleared out of the financial system, and we see true, sustainable economic growth again. It doesn't matter who gets elected to the White House, this will have to happen... or else the US stays mired in a longer-term recession/depression for at least 10 years.

Fiscal conservatives will probably be disappointed, unless President Romney gets "fiscal religion" and makes the tough budget choices in Washington. Based on past history, I'm not optimistic that will happen.

While this isn't a complete list, these are a few things to watch for. As the Chinese blessing (or curse) says: "May you live in interesting times." That's the best description I have for our world in October 2012. I hope that you and your family are prepared today for the interesting times to come.

Diary of a Monetary Madman

That's what I would call "Helicopter Ben" Bernanke's latest ramblings from this week's Federal Reserve meeting. The 2nd round of Quantitative Easing (or money-printing on steroids) is supposed to kick start the economy back to health.

The only problem is that excessive money creation and debt is what caused our current recession/depression. Both Republicans and Democrats around the country seem to be debt junkies who don't want to go "cold turkey," and start the process of the long financial hangover - which will be the start of a true economic recovery.

Many Americans still believe that the Fed and the federal government have the power to bring the economy back to health. In reality, the best thing they can do is quit trying to "help," and get the heck out of the way so the real recovery can begin.

Obama, Hillary and the Stock Market

Conventional wisdom seems to say (if you watch CNBC and Larry Kudlow) that Wall Street prefers Miss Hillary to Obama as the Democratic nominee. That's scary to think that financial professionals prefer an avowed socialist/Marxist to another lesser-known socialist.

Especially when he has Paul Volcker as an economic advisor; and has everyone forgot the socialized health-care fiasco (also known as Hillarycare) she tried to foist on our economy back in 1993?

I guess people prefer the devil they know to the one they don't.

On the Republican side, John McCain is no picnic either. He's the co-architect of McCain-Feingold Incumbent Protection - er, I mean, Campaign Reform Act. In my opinion, this automatically disqualifies him for higher office.

Talked with a friend of mine in Illinois who's not a political junkie, and even he can see that there's no real difference or choice between Obama, Hillary and McCain.

Like John Loeffler says, it's Socialist Party (R) vs. Socialist Party (D).

It's amazing that the President and Congressmen from both parties in Congress (with the exception of Ron Paul) don't seem to have a clue about what's going on with the skyrocketing prices of food and energy. The lack of understanding, vision and leadership with regards to energy, the sub-prime mortgage fiasco and resulting credit crunch is amazing.

On one hand, left-leaning folks in Congress admit that we need more domestically produced oil and gas to reduce our dependence on imported Middle Eastern oil; but we can't drill in the Alaska National Wildlife Refuge (ANWR), because that would be too harmful to the environment and leave a bigger 'carbon footprint' on the earth.

What a bunch of BS - the only "footprint" should be on the backside of these idiots, kicking them out of Congress for such utter stupidity.

The Republicans don't get off easy, either. A lot of them believe we should "stay the course," "finish the job," and "win the war in Iraq." Never mind that after five years, Americans still haven't been told exactly what the job, mission or goal(s) are in Iraq.

And the US military is the largest American consumer of oil and gas. Why the hell are we still over there in this Forever War, when all Americans are getting squeezed every time they fill up their gas tanks and buy groceries?

I know that Republicans in Congress tell us over and over that because those darn Democrats are in control of Congress, that's why foreclosures, oil and gas prices have gone up and we aren't as well off economically. Well.... not exactly.

The Federal Reserve is the biggest culprit behind higher prices. This excess printing of money to pump up the economy, the stock market and bail out investment bankers is the biggest cause of higher prices. It's more money chasing the same number of goods.

Now didn't you so-called 'conservative Republicans' have six years control over Congress, and you basically fiddled while these problems were burning? Didn't you let these mortgage monkeys commit fraud, by lending to anyone could fog up a mirror... and sell these bogus loans to Fannie Mae, Freddie Mac, and Wall Street firms?

I could go on much longer, but I'll cut this rant short. The bottom line is that there's no real choice for President between McCain, Hillary and Obama. The lesser of two evils is still evil. No good is still no good.

I don't know what the solution to this political problem is. Probably a downturn in the economy that's sharp and painful enough to re-inject common sense into enough Americans. Wish I could see a better answer, but that's how I see it.

More Stupid Government Tricks

Mike Shedlock hits it on the head - again. The latest call from FDIC chair Sheila Bair to prevent more foreclosures from occuring is just more of the same government intervention that got us into this mess.

If the Fed and Alan Greenspan hadn't lowered interest rates to rock-bottom lows, juiced the money supply, and encouraged everyone with a job and a pulse to get a mortgage and buy a house, we wouldn't have this gross misallocation of resources, and this mess in the first place.

Ron Paul took Bernanke to school (again) about the dangers of government intervention in the financial markets, and loss of civil liberties during the Fed Chair's latest testimony to Congress. This unholy association of business and government isn't just the wrong prescription for America's economic woes, but is an increase of the Fed's power - which is virtually unchecked by our Constitution.

The Declaration of Independence says Americans have the right to 'life, liberty and the pursuit of happiness,' not a guarantee for 'price stability and maximum employment,' which is what the Federal Reserve is supposed to do. But that's not the role of government as defined by our Founders. Government can't (and shouldn't) try to promote an 'Ownership Society' or any other guarantee of financial or other security. Whatever the government can give, the government can also take away - too many Americans have forgotten this important point.

When you listen to what Congressman Paul says about our economy, monetary policy and the role of government today, he makes more sense than any other politician in Washington today. It's an absolute travesty that the so-called 'conservative' Republican party tried to ignore, mock and railroad his candidacy for President. The GOP is like a headless chicken running around in circles, and the Democratic party isn't much better.

As John Loeffler from Steel on Steel says, it's Socialist Party (D) and Socialist Party (R), with very little difference between them. Ronald Reagan said it best: "Government is the problem, not the solution." Americans need to remember that the government that caused our financial and economic mess isn't the best entity to try and solve it.

Only time, the free market, and getting government out of the mix are the best solutions for our economic and financial woes.