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The reaction to this news in the credit markets drove Treasury prices higher, which drives yields in the opposite direction. We are close to a redline zone that will make our debt less attractive. Of course, this is a depending on whom you might be talking to at the time. Some folks will take the xenophobic stance assuming that there is still no better debtor than the United States. What other country is willing to go deeper into debt today to help business tomorrow? These believers in the extended deficit are convinced, for that reason alone, that our debt, no matter how large or for what reason, will always be attractive to foreign investment. And they may be right.

Then there are those, and I admit that this school of thought looks very attractive indeed, who believe that the lack of inflationary pricing in this country may not make us as good a customer for these international purveyors of goods. Normally this would not be a problem but with so many factories now up and running worldwide, cheap labor and low cost materials make production a must. These companies are starting to sacrifice margin just to keep their foot in the door.

Currently this country's deficit is now 5% of the GDP and climbing. Long term promises by the Federal Reserve Chairman Alan Greenspan and his governors all suggest that they are comfortable with these numbers and the reports that have been signaling the economy is on the right track. With the exception of the unemployment numbers last Friday. Before bankers in Berlin on tuesday, the chairman reaffirmed his stance that weak job data has no bearing on the economic recovery because productivity was so good.

Mr. Greenspan acknowledged the growing concern about the deficits that this country seems to have no problem racking up. "There is, for the moment, little evidence of stress in funding US current account deficits," he said to those same bankers. "Inflation, the typical symptom of a weak currency, appears quiescent."

Typically, a good Greenspan watcher would look for telltale signs and phrasing in his speech and build speculation on that. For our example, we will look at "for the moment". There is as I mentioned earlier a quickly approaching redline for the amount of debt the world markets can absorb. Because the dollar has dropped so much against the Euro and the Yen, our newest best export is deflation. But don't think for one minute that the Europeans and the Japanese are going to let that happen just because Greenspan suggests that the markets will make all of the necessary corrections.

The debt that the US is asking the world to buy is wholly different than the debt the markets would like to purchase. When private corporations issue debt, it is usually the result of a need for capital to grow. Contrary to this, the current account deficit is almost entirely public sector borrowing. With yields continuing to drop, the markets will not be able to fix this problem as Greenspan believes will happen. If the dollar goes into freefall, there will be little the Fed chairman can do. Only the US, these foreign investors believe, will be able to do what needs to be done - eventually.

For investors, that view of the horizon looks very unsettled. The falling dollar has created some international opportunities worthy of a gander. This is because these funds could be considered a currency bet and popular European speculation sees the dollar falling even further. With high yield funds ending the year with a 24.37% return, the current year looks fraught with short and long term risk. But worry not, there is hope.

Inflation will not be kept at bay for long. As soon as interest rates begin to rise, inflation will follow. A diverse bond fund that buys both emerging markets and Treasury Inflation Protected Securities (TIPS) might be an excellent place in the brewing storm. Another sector worth looking into is the municipal bond funds. Some of these funds are paying a healthy return north of six percent and are tax exempt. As long as the interest rate does remain low, money will continue to be incredibly cheap to borrow for municipals in the short term.

Today's Commentary: 01.12.04
Skewing the Law: The Reason Jobs can't be Created.
Captain Edward Aloysius Murphy, the oft-quoted World War II pilot would have loved Mr. Bush. His belief in such axioms as, "if something can go wrong, it probably will", were subtle observations about the Air Force in the 1940s. If the Captain were here to offer a new version of his laws today, they would be much the same only tweaked slightly to reflect the new look at law making that has become this administrations hallmark.

We are all believers in natural law although many of us aren't even aware of the intricacies involved in this adoption of thought. Natural laws make us feel comfortable. They seem to be supported by evidence that we can see and therefore, believe. But some of these natural laws have played havoc with all of the other observable things in our little universe. So as the evidence stacks itself so neatly on the economic front, is it safe to assume that there is some natural process at work? If you do think that good things are about to happen, you would be merely positing a law making the evidence to support it the reason for its being?

The President's Law of Downism is Upism is a theoretical look at statistical reversal that has been the base of this administrations belief that the economy is improving. They hope that when it does improve it will propel Mr. Bush back before the Chief Justice in early '05, swearing to uphold the laws, his and ours for another four years. Allow me to offer several examples of this law at work.

This past week, the new year's first piece of statistically ambiguous economic report was released closing the books on 2003. The December employment report was posted with a slight decline in unemployment, from 5.9% to 5.7%. This was immediately seized upon by the President as he spoke to women entrepreneurs gathered to hear him talk about the recovery that seems to be just shy of happening.

That dismal number, reflective of only 1000 new jobs created, a cool 149,000 shy of best guessed estimates, and the bigger fact, a regression in the amount of people trying to find work, was spun as a good thing by the President. And why shouldn't he see it that way, using his own law writ large and the underpinnings of natural law, proven or otherwise, he can't help but see the writing on the wall as positive.

But this is all a set up to get you to buy a new way to create jobs with legitimacy but not jobs that help those already in the unemployment line or just tired of looking. These ghost jobs are performed by illegal immigrants who, at great risk make their way into the United States despite the ever-increasing budget awarded our Border Patrol. Mr. Bush's desire to provide documentation to this group is without a doubt a misguided attempt to help make those unemployment numbers look better fast.

I once spent some time on a beach in Nice, France in the early eighties. The place had an aura about it that made you think that you too could live here, work here, and otherwise soak in the romantic notion that is the south of France. In those days, France along with the rest of Europe had adopted a similar program to the one proposed by the President. A work visa was required to get a job, I was told during the time I entertained the possibility that I could become an expatriate. The visa unfortunately could only be had if you had a job.

In an effort to increase his popularity among the Hispanic and Free Trade communities, he wants to dangle the carrot of legitimacy in front of a people that are much wiser than he is. These jobs would need to follow this group into the daylight also, creating a situation that may just jeopardize the very jobs that are currently paying these shadow workers under the table and off the books. Stepping forward and looking for these handouts is supposed to increase the overall wage base for these workers as well. With almost zero wage growth among the general wage earners of this country, these pay raises will either not come or come at the cost of taxes paid.

In all fairness though, allowing these people the chance to become productive citizens without becoming citizens with a six year time limit, could be nothing more than an Ashcroftian exercise in alien round-up. Hard to say at this point in the proposal. But adding these people to the job numbers won't help the underlying problem with this recovery.

Aside from the Bush accounting, there are two ways that unemployment numbers are calculated. The payroll survey, based on information provided by 400,000 companies (from a total of nine million incorporated businesses) does not include those who have created work for themselves. This survey is generally discounted for that one reason. The household survey, a cross section of 60,000 families would capture those independents the payroll survey missed and might explain why unemployment numbers have fallen dramatically. But those workers, estimated to be well over a million in the last half of last year, significantly offsets the job creation the household survey reports.

Flat wage growth accompanied by stagnant job growth that supposedly is a result of robust productivity, do not paint a rosy picture moving forward. Companies who are comfortable with these productivity reports, 9.4% in the third quarter of '03, understand the effects of job growth. Any reason to begin the hiring process in earnest would lead to a slight decrease in profits in the short term, and in the long term, pricing pressures as the momentum picks up in marketplace. This would have some serious effects on any comparisons to previous years profits. This cost of job growth is not priced into stocks. Pricing pressures are almost welcomed by the Fed hoping that some inflation, not alot, would be better that the current stagflation many businesses are experiencing.

Bernard Bernanke, an influential Federal Reserve governor as much as told investors that the interest rate would stay low in the new year to keep those consumers fueled with borrowed money. With the rate of consumer debt now approaching 15% of GDP, this is not a long term solution either.

Perhaps the best law to apply here Mr. Bush might be my simple offering of The Law of Reversal and Apology, which allows one to remit their misunderstanding of natural law and change course and in the process receive consideration for such mistakes. The only penance would be forfeiting your re-election and in doing so the President you would be forgiven much the way Newton was forgiven his laws, many of which were reduced to approximations by modern physics.