Battle of the Budgets….dead ahead


There’s a battle going on and the battle is which version of the 2014 budget will be approved? The folks in DC are jockeying for position to determine which budget will be approved. Last month, two budgets were revealed: the Ryan budget, produced by GOP Congressman Paul Ryan and the Murray budget, produced by Democrat Senator Patty Murray.

The issue is the Ryan budget passed the GOP controlled House of Representatives but can’t pass the Senate. The Murray budget passed the Democrat controlled Senate but can’t pass the House of Representatives. This week President Obama will reveal his version of a budget.

At this point we don’t really know what his budget will contain as he was supposed to release it on April 1st but elected to wait until Wednesday, April 10th to do so. So what do we know? We know that his budget will include “entitlement” cuts to Medicare and Social Security. Any increase in Social Security payouts will be based upon “chained CPI” which is not reflective of the true COLA or Cost of Living Adjustments. Chained CPI is based on a formal number issued by the Federal government. So, if officially the Consumer Price Index went up 2.1 percent over the course of a year, then that’s what the increase should be. If oil goes up to $140.00 a barrel over the course of that year, well then you’d wait a year before it’s reflected in the increase. In the meantime you have to pay the increase if you drive a motor vehicle that uses gasoline. The President, I suspect is offering this as a “dove” so to speak to the GOP. I don’t think the GOP is convinced that this is enough.

Medicare cuts have been well known for quite some time. The 2% across the board cut to this program which started on March 2nd due to the sequester has resulted in some seniors being denied treatment. These seniors have catastrophic illnesses and medical centers that treat them have denied to do so as they claim that “we’ll be out of business in 6 months to a year if we did so.” So seniors who paid into the system their whole working lives are being denied benefits because DC can’t get their act together.

While we’re on the subject of the sequester, I had written previous articles concerning the impact of the sequester and this past Friday the monthly Jobs Report showed a gain of 88,000 versus an expectation of 198,000. This past Thursday Unemployment Claim numbers were released that showed an increase of 33,000 new claims. As readers of Market Tea Leaves know, I’ve been saying for months that this debt ceiling/budget issue will come home to roost and unfortunately it’s starting to happen.

The reader may be asking what does this have to do with the markets. In a word: everything. The markets do not like uncertainty when it comes to financial issues. All we need do is to look back less than two years ago in the summer of 2011 when stocks fell and the bond market roared. The 30 year bond was trading well over the 150 mark and ironically we’re getting close to that again.

The folks in DC seem to view the economy as some kind of finite number that can never be surpassed. In other word, it can’t really grow much further. Interesting. During the Reagan years GDP in the United States was 11-12 Trillion dollars, if we operated with that kind of GDP today, it would be considered a depression. One thing is certain, I’m sure the GOP and the far left won’t like Obama’s budget either.

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Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.