Commitment and Resolve

A 2011 realization: The point at which a task is contextually the most difficult to accomplish is the point where its completion matters most.

A simple example involves a fitness regimen. Of course, there are days where one may be travelling, with limited time to run; where one may be stressed, with little motivation. These types of days will occur, but if the goal (there must be a goal) is to run six out of every seven days, the "difficult" days are by far the most critical. Specifically, if one can uphold his commitment through these abnormal yet inevitable scenarios, "normal" days will be psychologically bolstered. Conversely, if one allows an unexpected event to break his routine, the routine's foundation gradually crumbles. Traveling? Wake up an hour earlier. Stressed? Remember, fighting the headwinds and completing the task will ultimately clear one's mind. Replace traveling and stressed with x and y, and the same lesson applies.

"Gold Price" + VIX Correlation

Fascinating chart from The Economist:



Google query data is more pertinent and powerful than one might think.

Tax Relief?

The House and Senate have finally agreed to a two-month extension of the payroll tax cut, equating to a $33b total package. While this is slightly positive news for 160 million American workers, many do not realize (or simply ignore) how the cut is funded. As simply stated in today's Wall Street Journal, "the bill's $33 billion cost is expected to be covered by an increase in fees charged to mortgage lenders by government housing agencies Fannie Mae and Freddie Mac...the fee increase, expected to raise about $35.7 billion in revenue over 10 years, likely would be passed on to new-home buyers, raising their monthly mortgage payments by as much as $15 on mortgages of $210,000." Suddenly, it seems as if the tax cut isn't so beneficial. Of course, one could argue that the sample sets of those in need of tax relief and those seeking reasonable mortgage financing are somewhat exclusive, but such a dichotomy is difficult to define.

LTRO

On its face, the ECB's Long-Term Refinance Operation (LTRO) seems to be a blessing for troubled Eurozone financial institutions, especially when used in conjunction with the classic "carry trade" concept. At a high level, the banks would have access to cheap liquidity (borrowing at the 1% benchmark rate), which, in turn, would be used to purchase higher-yielding sovereign debt (anywhere between 500-700bps for Spain and Italy based on recent levels). Not only would the banks pocket the delta (approximately 400bps) as profit, but also the peripheral nations would benefit from increased demand at sovereign auctions. In addition, the sovereign bonds could be used as collateral for access to the ECB's cheap lending facility, thereby reinforcing the positive feedback loop.

Religious Liberty?

Today's New York Times highlights the efforts of many of America's Catholic bishops to fight for their "religious liberty." In doing so, Archbishop Timothy Dolan accuses our culture of trying to "neuter" religion, by pushing "religion back into the sacristy."

It is no secret that the Modern philosophers as far back as Hobbes and Locke viewed dampening religious zeal and removing it from the public realm as a cornerstone of their cultural project. But I place much of the blame on 21st century America's resistance to organized religion on people like Dolan, whose resistance to gay rights and other social issues places them at odds with modernity.

The head of the Bishop's committee on religious liberty, William Lori, exhorted his flock to stand up for the rights of their religion -- most notably, the right to deny gay couples their right to adopt children. In fact, Lori claims that laws which make it illegal for state funded adoption agencies to deny gay parents adoption rights infringes on their religious liberty, and forces Catholic agencies into insolvency. Apparently, these agencies would rather help no one, and let scores of children remain in foster care, than to let gay couples adopt them.

Focusing on issues like gay adoption not only shows overt prejudice but also demonstrates seriously twisted priorities. In the words of the liberal Catholic, John Gehring, "The bishops speak in hushed tones when it comes to poverty and economic justice issues, and use a big megaphone when it comes to abortion and religious liberty issues."

When unemployment remains above 9 percent and with poverty rates at tragically high levels, how can anyone take seriously people who claim that the real ills our country face result from gays being allowed to adopt. These skewed priorities are what is moving religion back into the sacristy, as the Bishops' concerns become less relevant to everyday people.

So the next time Dolan and Lori claim to be victims of progressive culture, they shouldn't blame others. Instead of looking to the left for reasons why religion is becoming irrelevant to many Americans, they should stare straight ahead into a mirror.

The Unjustified Deification of Paterno

Comparisons between the Penn State and Catholic Church sexual abuse scandals are right on point. But the analogy extends beyond the nature of the crime. Fans treat sports like religion, and deify those who participate in them. Saturday and Sunday are no longer Sabbath days, but are days to watch college and pro football for millions of Americans.

The fan's reverence of sport - and of those who play on and coach their team - is no more evident than in the responses of the Penn State student body who came out in droves after their canonized coach was fired. Paterno had been deified by the PSU faithful for decades, and, in their eyes, could do no wrong. Rather than confronting the uncomfortable, yet undeniable reality, the student body averted their collective consciousness. Instead, they decided to sink back into the comforts of their delusion, blaming the media, the Board of Directors, and anyone else who attempted to elucidate the truth - that all men, even ones as revered as Paterno, are fallible.

More from Governor Gaffe Machine

In owning up to his epic gaffe last night at the Republican debate, Rick Perry claims that "I'm kind of proof positive that...people make mistakes when they make statements" Governor Perry proved his point in the very next sentence by stating that his "conservative beliefs about getting this country back on track are very deep founded." Deeply founded, anyone?

I guess, along with which agencies he wants to demolish, Perry has forgotten what most English speaking people in America over the age of 13 should know-- the difference between adverbs and adjectives. No wonder the Department of Education is on the Perry's chopping block.

Into the Danger Zone

Two days ago, the Financial Times published an article highlighting the fact that, with Italian bond yields at 6.68, Italy has entered "the danger zone." In response, Paul Krugman muses in his blog that "the next few days could be very interesting." And indeed they have been.

Yesterday, in an attempt to calm the markets, Berlusconi announced that he would resign once the Italian budget is passed. The S&P 500 rose yesterday after the announcement, encouraging observers to draw connections between the two events where there were none, confusing correlation with causation. And sure enough, the S&P opened more than 20 points down, erasing any gains that may have been related to the Berlusconi announcement.

But the importance of this metric in gauging Italy's troubles pales in comparison to that of the aforementioned bond yield. Italy has sunk deeper into the "danger zone" as yields increased to 7.4 today. It is clear that the prospect of Berlusconi's resignation did absolutely nothing to restore confidence in the Italian bond market. He has been a pitiful Prime Minister and a national embarrasment, but Italy's problems run deeper than one man.

Cain's Response

For those who have not been paying attention, Herman Cain's response to his sexual harassment controversy is just as incoherent and asinine as his tax plan and abortion stance. Cain blames the "Democrat Machine" for charges of sexual harassment that came 15 years prior to his run for President. According to the logic, his accusers - obviously card carrying members of the Democrat Machine- must have know 15 years ago that Cain wished to run for President as a Republican, and made their claims to destroy his eventual political career. This Liberal Cabal was so sneaky in their two-decade long plot against Cain, that they managed to file suit against The Godfather of Pizza and convince his attorneys to settle outside of court all without him knowing.

Despite the Vast Left Wing Conspiracy, Cain is "in it to win it." He's not giving up anytime soon. And one must admire Cain's persistence - no one can stop the Cain Train. But then again, persistence might not be the best quality to be projecting when accused of sexually harassing multiple women.

Spare the Rod?

After the recent release of a video showing a Texas Judge abusing his child and the death of three children at the hands of parents in possession of a book which promotes the virtue of corporal punishment, physical discipline within the household is coming under increased scrutiny. The book, titled To Train a Child, is written by an evangelical pastor and his wife, Michael and Debbie Pearl, and has sold nearly three quarters of a million copies throughout the United States, schooling its readers on the proper way to beat a child into submission.

Given the book's wide fan base and the small number of deaths - three confirmed - it doesn't make sense to directly attribute the deranged actions of the few solely to the guidance of the Pearls. This, however, does not excuse the authors who have made a career out of cloaking their affinity toward child abuse under the veil of religious zeal.

Pearl attempts - and ultimately fails - to make a comparison between his book and the Alcoholics Anonymous hand book. "If you find a 12-step book in an alcoholic's house, you wouldn't blame the book." No, of course you wouldn't because the 12-step book is designed to guide people away from their affliction. Pearl's book, on the other hand, only encourages the impulses of the deranged, giving them biblical justification to indulge in their abusive urges.

Infrastructure Bill Fails to Advance

The Democratic infrastructure bill failed to pass the hurdle of a Republican filibuster today, as the minority party managed to halt the bill despite the fact that it received a majority of Yea votes. The bill featured 60 billion dollars in infrastructure spending, including a 10 billion dollar infrastructure bank which Republicans have historically supported - unless, of course, Barack Obama is President and he chooses to fund the Bank with a 0.7% surtax on incomes over a million dollars.

Sensing that Obama will claim - with justification - that Republicans have obstructed job creation efforts so that millionaires can keep an extra 0.7% of their income, Mitch McConnel has claimed that "Democrats are more interested in building a campaign message than rebuilding roads and bridges." Rather audacious words coming from the man who once proclaimed that "the single most important thing we want to achieve is for President Obama to be a one-term President."

Such partisan bickering from McConnel is disheartening, but has become all to familiar in today's political climate. Perhaps Zero Hedge says is the best: "America decouples right on schedule: Senate Fails to Advance Democrats' $60 BLN Infrastructure Plan." But let's not pretend that both parties are equally complicit in fracturing our country's politics, and in letting our infrastructure to continue to crumble.

Simplification

With hints of Cain's "9-9-9" plan, is this relatively simple alternative to the Volcker Rule in fact feasible? Brown Brothers Harriman seems to exemplify and legitimize the partnerships of old. Regardless, the authors' most thought-provoking decree reads as follows: "Bankers at Morgan Stanley, Goldman Sachs and other leading firms may complain about it, but they should look at the portraits on the wall of their predecessors who, as partners of the very same firms, worked and prospered under such a personal liability rule every day of their lives." Indeed, personal culpability is a powerful incentive.

Summit Expectations

The next ten days in Europe are critical, not only for the resolution of the peripheral sovereign debt crisis, but also for the future of the Eurozone. Morgan Stanley's Daniele Antonucci expects the following announcements at the upcoming policy meetings ("EU Summits" from 10/21-10/24, especially the Merkel/Sarkozy meeting on 10/22): (1) bank recapitalization providing higher Basel III Tier 1 ratios, primarily backed/funded by the strong sovereigns (France, Germany) and the EFSF (2) larger PSI for Greece, with NPV of haircuts increased to a range of 30-50% from 21% (3) disbursement of a further (specifically, sixth) loan tranche of the first bailout package and confirmation of second package (4) strong push (in Antonucci's words, a "political committment") towards Euro area economic coordination; it is highly possible that such coordination would involve some sort of legally-complex Eurobond issuance.

More on point (1): MS's 10/21 European Credit Strategy report includes a fascinating chart depicting capital ratios across Western Europe, with the standard T1 ratio along the x-axis and tangible common equity to tangible assets on the y-axis. Here we see the average ratios to be approximately 10% and 4%, respectively:

Interestingly, PIGS look relatively better off and France/Germany look worse when using the TCE/TA metric. The charts below plot the iTraxx SenFin (banks included in the senior debt CDS index) against the two previously discussed US and EU capital ratios:

So, then, what might all this mean? One of the most important differences in the two measures of bank capitalization involves the concept of risk-weighted assets (RWA). The MS strategists elegantly explain: "The source of Europe's low risk weightings, and market concern, is sovereign debt." Indeed, the banks in the iTraxx SenFin index hold roughly €700b in PIGS debt, but this debt is given a zero percent risk weighting (a sheer anomaly given current conditions, but historically sovereign debt has been deemed risk- free). This "makes for a relatively simple storyline: Europe's capital ratios are excessively flattered by risky sovereign exposure." But, however, we must remember that this €700b in sovereign debt exposure represents a mere 3% of the European banking system's €35t in total assets, a fact making the sovereign debt weighting "frankly irrelevant." In addition, mortgage delinquencies (percent of mortgages 90D past due) are significantly lower in Europe (lower leverage, higher underwriting standards) than in the United States, perhaps providing a reasonable justification for the lower risk weightings of European debt.

Ultimately--as I have said before--making sense of Eurozone bank recapitalization demands multifaceted and flexible analysis. More to come next week.

Life After Debt

NPR reported yesterday on a previously unreleased Clinton Administration document which details the possibility of the United States Treasury paying down its entire debt - by 2012, no less. The paper, titled Life After Debt, explores the question of "what would the world look like without Treasury bonds?" Since much of the global economy relies on Treasury bonds, the effects of a world without them would be unprecedented. Even after the S&P downgrade, the world is still flooding into the Treasury market (evidenced by historically low interest rates).

Alas, with US pubic debt at over 14 trillion, the question over the ramifications of an even Government balance sheet seems more like a fantastical thought experiment than a potential problem. One needs only to glance at the graph below (from the CBO via NPR) to appreciate how far we've fallen.

The Obama Doctrine

With Qaddafi's death earlier today comes further vindication of the Obama Doctrine. That is not to say the President is solely responsible for his death; in fact, it is quite the contrary, as Qaddafi died at the hands of the Libyan people. And that is the point.

Obama's foreign policy team has strategically decided when to intervene, when to sit on the sidelines, and when to pull the strings behind the scenes. The administration has shifted away from nation building and focused much more on counter-terrorism and covert operations than the previous administration. In the words of Foreign Policy's David Rothkopf, "The Obama Doctrine prioritizes the use of intelligence, unmanned aircraft, special forces, and the leverage of teaming with others to achieve very narrowly defined but critical goals." Such a strategy has resulted in the killing of both Osama bin Laden and Anwar al-Awlaki.

By focusing on such narrowly defined goals, Obama is essentially a 21st century version of George H.W. Bush - but with one crucial difference: size of force. Bush 41 adhered to The Powell Doctrine which called for an "overwhelming and disproportionate" force to reach narrow goals. Obama, on the other hand, has utilized advancements in intelligence over the past 20 years to advocate for a slimmer, more targeted use of force. And given his successes, it is impossible to deny the wisdom of many aspects of this strategy. Say what you may of Obama's domestic shortcomings, but the President's foreign policy strategy deserves to be looked at as a template to build on for administrations to come.

Is Gadaffi Dead?

If Gaddafi was indeed "...shot in both legs and in the head," and if the body "will [in fact soon] be arriving in Misrata" (words of media spokesman Abdullah Berrassali to Sky News), the world is a better place. Celebrate, Sirte.

More on Perry/Romney

Today's New York times features a piece detailing the Romney/Perry rivalry back to 2006 when Romney was head of the Republican Governors Association. More and more as one watches the debates, however, does this rivalry reveal itself to be an uneven contest. Perry may have ideological consistency over the former Massachusetts Governors, but Romney is a superior candidate in every aspect. This will be made perfectly clear when, in a year, Romney will be preparing for his debates against Obama, and Perry will be swallowing his pride, endorsing Mitt Romney.

Which Mitt?

The Obama campaign, much like many others in the political establishment, is betting on Mitt Romney to win the Republican Primary. As a result, they are preparing for a general election campaign against the former governor. Evidence of this mindset can be found in the release of the DNC's new website WhichMitt.com. The website, which features various instances where Romney infamously flip-flops on issues of crucial importance to many Republican primary voters, clues us into the strategy of the DNC.

By characterizing Mitt as a flip flopper on issues like abortion, immigration, health care, and gay rights, the Obama campaign forces Romney to go on record during the primary as taking stances that are to the right of the majority of Americans - positions that he will be forced to walk back in the general election. This aims at having the two pronged effect of making Romney appear both as a right-wing conservative, and as a unprincipled and weak political shapeshifter.

So far, Romney has done well at addressing the second of the two attacks. Unlike in the 2008 campaign, he has not been backing away from his health care reform in Massachusetts, and is standing strong against his opponents. He has dealt with his main Republican adversary, Rick Perry, by chuckling away and patronizing Perry, significantly diminishing the formerly larger-than-life Texan. Perry looks like a stuttering amateur next to the polished Romney. The true test for Romney, however, will come not until he stands on stage next to the President of the United States -- a fact of which both he and the President are fully aware.

Back to Basics

In today's NYTimes article entitled "Chasing Opportunity in an Age of Upheaval," the author quotes UVA-grad and past leader of Hunt Private Equity Group Stephen Smiley as saying: "At some point we’ll start building houses again, and the consumer will go back to the store and buy what he needs. That’s going to create a demand for energy.” Of course Smiley's track record investing within the energy (oil and natural gas) sector is essentially unmatched, but is it really that simple? Does such a black-and-white projection qualify as legitimate?

Groupon Revisited

Groupon IPO, via Dealbook. Groupon's S-1, via Edgar. Things have certainly changed since my post in July; Lefkofsky is a sleaze.

Marketing expenses for the three months ended March 31, 2011 nearly equal expenses for the entirety of 2010 (which were, in their own right, staggering and highly unsustainable at $263.2m).

EK: No End in Sight

Eastman Kodak Company's (NYSE: EK) long-term outlook could not be more grim. S&P LCD reported this morning that EK has drawn on a large portion of its revolving credit facility (specifically, $160m draw out of $235m availability; $400m total ABL facility) for "general corporate purposes," namely to "bridge timing differences between cash inflows and outflows." CDS spreads blew up on the news--see frightening chart below.

Historical EK 5 yr CDS via CMA Datavision, in bps:

Warren Enters the Fray

Today Elizabeth Warren, Harvard Professor and architect of the newly formed Consumer Financial Protection Bureau, announced her plans to run for US Senate in Massachusetts. In an email to her supporters, Warren highlights her recent listening tour of the state citing her experience "listening to folks all across our state who know that we can do better, people who are frustrated like I am that Washington just doesn't get it".

Ms. Warren is not only painting herself as at odds with Senator Scott Brown, but is also subtly contrasting herself with the Massachusetts Attorney General, Martha Coakley, who lost the 2010 special election against Brown for Senator Kennedy's vacant seat. Coaklley infamously derided the idea that she had to "stand outside Fenway Park? In the cold? Shaking hands?" because she already had the support of the Mayor and school board of Salem. With comments like these, Coakly easily fit the stereotype of a northeastern liberal, disconnected from the people. Warren, on the other hand, is depicting herself as an advocate of working Americans who have been left behind. On her website, she highlights her middle class upbringing and her car experience as the "New Sheriff on Wall Street."

On a day when Republicans gained another seat in the House - that of former Congressman, and perpetual punchline, Anthony Weiner - Warren's entrance into the Senate race is a ray of hope for Liberals in Massachussets, and beyond. There is little doubt that Democrats hope to make the tenure of Scott Brown an abbreviated one - a mere blip in the history books between the Lion of the Senate and the New Sherriff of Wall Street.

Perry's Death Penalty Bona Fides

Today's Wall Street Journal editorial page opens with a critique of the "liberal elite." Big surprise.

In "Why they cheered" James Taranto explains that the those who were put off by the cheerful response during the Republican debate to Rick Perry's death penalty stat - that he has overseen more executions than any other governor - fail to understand the fact that an argument in favor of capitol punishment should give us a "tinge of patriotic pride." The logic, according to Taranto, is that since Europeans and Americans both favor executions, the United States government shows its respect for democracy by keeping capitol punishment legal. European governments, on the other hand, which are dominated by elites, autocratically impose soft justice onto their people. Taranto describes the left's reaction to the the applause as harsh, self-righteous, and simple minded, as if those so brazen enough to raucously cheer in favor of the death penalty possessed no such qualities.

I have always taken exception to the "how can the same people who are against abortions be in favor of the death penalty?" argument. The holes in that logic are so gaping they do not deserve the time to address them, and Taranto is right to assert that there is no comparison. But there is a parallel to draw between the two deeply moral issues.

Two nights ago, we saw a Governor boast, and the crowd cheer, about having the highest number of executions on record. Would we have ever seen anything like that on the other end of the political spectrum? Even those on the left who are most fervently pro-choice do not rejoice when abortion statistics spike. No one would celebrate the fact that more abortion procedures have been done in his or her state than in any other. Such a statistic would be a sign of a wider societal problem, rooted in poverty, lack of education, and a myriad of other factors. The same can be said about a high rate of executions. In fact, Texas ranks in the bottom half of the country in high school graduation rate and has wages below the national average in all but 18 of its 254 counties. And that is nothing to cheer about.

BAC?

Today's best headline from Zero Hedge: "Buffett Bailout Of BAC Sends Stock to Early August Levels, Changes Nothing." Indeed, Moynihan's claim that BAC did not actually need the $5 billion capital injection is particularly laughable. It seems like now is the perfect time to sell the spike. Even before today's news, Moynihan was uncompelling during a CNBC interview on the first trading day post S&P's US credit downgrade, where he said that the bank would, somewhat ambiguously, "continue to do what it was doing."

Coordination

Regarding Chairman Bernanke's speech at Jackson Hole tomorrow,  Pimco CIO Mohamed El-Erian (in an opinion piece for the FT) has the right idea: the Fed must not "run the risk of building another bridge to nowhere." That is, a third round of quantitative easing (this time: buying further out on the yield curve / MBS and agency purchases / something along the lines of "operation twist"?) will fail to effectively solve our country's economic woes. Bernanke's goal should not involve another leg of artificial stimulus; rather, he should devote all efforts to orchestrating tangible reform. Specifically, in the words of El-Erian, "a sustainable solution must...incorporate co-ordinated structural reforms on the part of agencies responsible for housing, the labour market, public finances, infrastructure and directed credit." Undoubtedly the most important part of the above proposition involves the notion of coordination. All too often we blame a single individual, body, or organization in the face of poor economic data, and a general unwillingness to concede greatly hinders meaningful progress. Our current situation, however, leaves no room for prolonged dissent.

LIBOR-OIS spread components (with one-year historical performance)

Value of Swap Lines

This morning's Bloomberg Brief offers commentary regarding the recent stress within dollar funding markets, and specifically assesses its impact on the global financial system. Joseph Brusulelas [astutely] mentions the fact that approximately $200mm in cash has been drawn from the Federal Reserve's dollar liquidity swaps facility (during the week ending 8/18), a source last tapped in October of 2010. Although this figure is minuscule relative to the ~$9bn drawn at the onset of the European debt crisis, it may be a harbinger of difficult conditions ahead. Perhaps more significantly, the one-year basis swap (3M Euribor less 3M USD Libor) declined to open at approximately -50bps, indicative of the fact that the USD is in greater demand (and therefore yields a premium to hold). Overnight lending rates have also increased; notably, according to Bloomberg, Credit Suisse has increased the premium it charges for overnight lending  by "an unusually large 8.5bps," suggesting rising counterparty risk. It will be interesting to follow the interbank and swap rates in the days and weeks to come.

Some historical context: in 2010, the FOMC provided dollar liquidity swap lines with the ECB and SNB to, as one would expect, "provide liquidity in US dollars to overseas markets." Foreign currency swap lines have been in place from April 2009 through February 2011 (in partnership with BOE, ECB, BOJ and SNB, "in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion"), but the Fed did not draw on these lines.

Today's FT Alphaville presents the argument that the institution of a new FX swap facility would be "a much more useful move than any form of QE," but notes that such lines "are not a permanent solution."

Fed Funds Rate

It is becoming increasingly hard to fathom that the federal funds rate once peaked at 20.06% in January of 1981, the year of my parents' graduation from the University of Pennsylvania. Approximately 30 years later, on the date of my own graduation from Penn, the discount rate sat at a near-zero 0.09%.



see: historical interest rate data in spreadsheet form from FRB

NAIRU Musings

The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is defined to be "a measure of how low unemployment can go before risking inflationary pressures," or, put another way, "the level of unemployment below which inflation rises." Laurence Ball and Gregory Mankiw of Harvard elegantly explain that this concept "follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run." Intuitively, this inverse relationship makes sense, as demand and spending tend to increase inflation, while simultaneously decreasing unemployment. Conversely, a high-level lack of aggregate demand (and, therefore, lower inflation) triggers higher levels of unemployment. Mankiw continues to say that "once this short-run tradeoff is admitted, there must be some level of unemployment consistent with stable inflation." That is, NAIRU should be deemed synonymous with the "natural" or organic rate of unemployment.

see: (1) NAIRU estimates from the Federal Reserve Bank of Philadelphia (2) great explanation of the relationship between NAIRU, the Phillips Curve, and rational expectations [section 3 of article; graph depicted below] (3) NAIRU and QE3

BAML's "Morning Market Tidbits"

"We are a strong believer in the view that market sell-offs stop when investors stop glaring at their Bloomberg screens." Here the BAML economists hint at the (somewhat obvious) fact that consistent negative news flow leads to selling in the market. Unfortunately, bleak economic reports from multiple continents will cause investors to remain glued to their terminals. Psychological expectations play a crucial role in periods of heightened market volatility.

Complex but thorough?

For those considering the feasibility (or impossibility) of Greece successfully avoiding a default, see The Economist's helpful explanation (especially regarding the complex structure of the French rollover plan). More to follow. For now, it seems that such a proposition will allay the fears of major creditors while simply masking Greece's own financial burden. However, perhaps contagion is more legitimate a fear than the collapse of a country with a FY2010 GDP of only $310bb.

The FDA's Graphic Imagery: A Step in the Right Direction

Two years ago, President Obama signed the Family Smoking Prevention and Tobacco Control Act into law which requires the FDA to beef up warning labels on cigarette packs. Instead of containing text only, the new labels will feature a graphic image that covers 50% of the front and back of each cigarette pack. This week, the FDA released the nine images it will be placing on the packages. They include a man smoking through a tracheotomy, a dead man with a T-incision (apparently after his autopsy), and an image of a diseased pair of lungs placed side-by-side with a healthy pair. Previous studies by psychologists have shown that graphic images like these encourage thoughts of quitting in smokers. The FDA has taking this into account by adding a 1-800 number on every pack which directs the smoker to a toll-free line offering help to those wishing to quit.

These results are backed up by experiments in behavioral economics which have shown that images like these are effective in deterring consumption of cigarettes by lowering their demand. In a study published by Kenyon College, economists rated the amount adult smokers would be willing to pay for either A) a regular pack of cigarettes with the current warning label B) a pack with a larger text-only warning label on the front C) a pack with a graphic image covering 50% of the front and back, and D) a "plain packaged" pack with a graphic image where all signature advertising such as the company's logo has been removed .

As part of the study, subjects were given a sum of money for their participation, presented a pack of cigarettes and asked to place a bid for how much they were willing to pay for the pack. After this process, an arbitrary "true" value of the pack is revealed. If the participant's bid was higher than the "true" value, then he purchases the pack for his asking price; if his bid is lower, he does not receive the cigarettes. By making participants monetarily accountable for their bids, the experiment possesses a high degree of external validity.

At the conclusion of the experiment, the results showed that, on average, the subjects were willing to pay $3.52 for the control pack and $3.43 for the pack with the large text-only label -- exhibiting a modest decrease in demand. When the graphic images were added, however, the asking price plummeted to $3.11, and when logos were removed, bids dropped even lower down to $2.93.

This experiment exhibits the efficacy of pictorial warning labels and therefore supports the FDA's new deterrence technique. It also demonstrates the potential to decrease demand further by instituting a "plain packaging" rule which strips logos from cigarette packages. As of now, no country has laws mandating plain packaging, and cigarette companies are sure to levy lawsuits citing free speech if such a statute were implemented (much like they did in response to the current law). Despite this, America should take the lead on this type of legislation like we did 45 years ago in becoming the first country to mandate warning labels on cigarette packs. Given that cigarettes account for 443,000 deaths every year in America - the equivalent of a 9/11 happening every two and a half days - the government should be doing all it can to decrease the demand for this deadly substance.

The Gingrich Campaign Hits Another Bump in the Road

In perhaps the most startling development in Newt Gingrich's rocky candidacy for President, the ex-Speaker's campaign manager resigned today, along with his entire Iowa team and key members of his New Hampshire and South Carolina staffs. In the words of Chris Matthews on Hardball, "I've never seen anything like this." Since the early days of his campaign, Gingrich has faced criticism for claiming that his extramarital affairs resulted from his sense of patriotism, and for his assertion that the Paul Ryan's Budget plan constituted "right wing social engineering." Most recently, in a strange move, Gingrich decided to go on a two-week vacation with his wife out of the country, just as his Republican competitors started revving up their respective campaigns. For many on the Gingrich team, the candidate's overseas gallivant was the breaking point. "The professional team came to the realization that the direction of the campaign they sought and Newt's vision for the campaign were incompatible," said Sonny Perdue, a campaign manager. Adding insult to injury, Perdue signed on with the Pawlenty campaign upon his resignation.

Diamond's Departure

When President Obama nominated Peter Diamond to sit on the Federal Reserve Board of Governors fourteen months ago, those of us concerned with our economy's rampant unemployment met the announcement with open arms. Diamond, a professor at MIT, has spent his academic career studying the labor market. Six months after being tapped by the President, Diamond was awarded the Nobel Prize for his work on unemployment. Adding to his credentials is the fact that Federal Reserve Chairman, Ben Bernanke, studied under Diamond. In his doctoral dissertation, Bernanke thanked Diamond by name as one of his mentors who "gave generously of their time, reading and discussing my work." Being a Nobel Laureate and an influential professor of the Chairman of the Federal Reserve, however, did not impress Republicans in the Senate.

Since his nomination last April, Diamond's credentials were questioned by those in the Senate Banking Committee who claimed that that he did not possess the requisite knowledge or experience to sit on the Board of Governors. Most vocal was Senator Richard Shelby of Alabama, who referred to Diamond as merely an "old fashioned, big government Keynesian." Over the past thirteen months, Shelby and other Republicans on the Banking Committee have stymied efforts to confirm Diamond at every turn, and finally, the Professor had seen enough.

Today, Dr. Diamond penned an op-ed in the New York Times, where he declared that he would withdraw himself from the nomination process, and return to his academic career. In his piece, Diamond asserts that those who blocked his appointment politicized the confirmation process and exhibited a misunderstanding of the Federal Reserve's mandate. Under the Federal Reserve Act, established in 1913, the Board of Governors has the dual responsibility of achieving "maximum employment and stable prices." In other words, the Fed aims at keeping both unemployment and inflation low. Given the nations 9.1% unemployment rate and a core CPI under 1.5 one may expect the Federal Reserve, and the politicians who nominate the Board members, to be more concerned with gaining full employment than with the threat of future inflation. Instead, however, inflation has become Public Enemy Number 1, with the issue of protracted unemployment falling by the wayside. In Chairman Bernanke's historic first press conference back in April, for example, inflation concerns dominated the discussion.

This overemphasis on the threat of inflation at the expense of addressing mass unemployment, combined with claims that Diamond - an expert in employment - is unqualified to serve on the Federal Reserve, demonstrate that many in Washington do not fully understand the dual mandate of our nation's central bank. Today, we lost the opportunity to have a Federal Reserve Governor who is uniquely qualified to address the scourge of mass unemployment that our country faces. If those like Senator Shelby continue to block people like Professor Diamond from entering public service, they will do so at our nation's peril.

Chrysler's Return to Profitability

Bloomberg has reported this morning that the Italian auto company Fiat S.p.A. (F) will purchase the U.S. Government's remaining shares of Chrysler Group LLC for $500 million, a deal which marks the end of the government's position in the bailed-out automaker. Simply put, "Fiat [has taken action] to consolidate control." Now, the only other stakeholders in Chrysler include the Canadian government (which owns shares that could be worth up to $135 million, or 1.7 percent of the company), and the United Auto Workers (UAW) retiree healthcase trust, which owns 41 percent, or approximately $3.42 billion in shares.

Many of you may be unfamiliar with the mission of the UAW. So, because of the magnitude of its stake in Chrysler, I will provide some brief background information. According to the union's website, the UAW is "the union for America’s auto workers, representing more than 100,000 working men and women at U.S. auto assembly, stamping, engine and powertrain plants." UAW members are associated with a number of leading automakers, including but not limited to Chrysler, Ford, GM, Mazda, Mitsubishi, and Volkswagen. Specifically relating to the Chrysler story, the union's employee healthcare fund, or the UAW's Voluntary Employees' Beneficiary Association (VEBA) trust, will have to decide what to do with its approximately 46 percent stake in Chrysler Group.

With the purchase of the government's remaining shares in Chrysler, the Treasury Department comes out roughly $1.3 billion short of its initial investment. This figure, although significant, is far outweighed by the tax revenue which resulted from the roughly 1 million jobs saved by the bailout. When multiplying the number of jobs saved (1 million) by the average salary of a UAW member ($46,380), and then multiplying by the percentage taxed by the Federal Government (25%), we see that the Government received roughly $11.595 billion in tax revenues. When combined with the $1.3 billion lost, we see that the Treasury netted $10.295 billion.

Given the success of the program, the President visited a Chrysler plant in Toledo, Ohio this past week, in what felt remarkably like a campaign stop. In echoing his 2008 campaign slogan -- and in contrasting himself with those who advised not to prop up the industry - the President said "I want you to remember all those voices who were saying 'No, no we can't." The auto bailout, which was initially unpopular and opposed by Republicans, is now being used by Obama as a selling point. In an election cycle that is bound to be dominated by discussion of the economy, the President is wise to focus on the few bright spots in an otherwise lackluster economic performance since his inauguration.

Two Points

First, I am glad that Romney's agenda begins with a complete repeal of Obamacare. It is absurd that Americans should be forced to subscribe to anything, let alone health insurance they don't want or need. Just yesterday, Judge Jeffrey Sutton of the U.S. Court of Appeals for the 6th Circuit said it best: "It's just not proper to make people buy things, and that's the point." Romney's current reflection on his Massachusetts healthcare plan is honest and sincere; he is willing to address his mistakes: "Some things worked, some didn't, and some things I'd change," he says. Moreover, at least his failure involved a single state as opposed to an entire nation. He now knows first-hand why the Patient Protection and Affordable Care Act must be either fundamentally restructured or entirely repealed.

As for Romney winning the presidency in 2008, what is the point of imagining an "alternate universe?" In an alternate reality, it's not really "safe to say" anything. Such pondering is an empty exercise grounded only in speculation and hypotheses. And if you're wondering why the Detroit automakers are still alive today, why don't you pay attention to what actually solved the problem. Bailout money doesn't do anything just sitting in the bank, and Obama should take none of the credit. GM, for example, went and hired the absolute best of the turnaround business, Jay Alix of AlixPartners. Alix helped GM emerge from bankruptcy in an unprecedented and unbelievable 40 days. Nevertheless, Geithner himself asserts that, at the time of the bailout, "[Detroit's turnaround] was anything but assured." In an alternate universe, Detroit would have been healed perhaps more effectively with Romney at the helm.

What Would Romney Do?

In FXD's most recent post, my fellow Pennyon contributor exhorts the American people to "move past" Romney's hypocritical 2006 health care reform law, and realize that we should be focusing on the former CEO's economic insight instead of his record on social reform. I could not agree more with FXD's sentiment that we should be aiming our attention at the dire economic situation in which Americans now find themselves. Someone, however, should pass the memo on to Romney. Instead of moving on from the issue of health care, Romney said in his first official campaign speech yesterday that his agenda "begins with a complete repeal of Obamacare."

In the same speech, Romney received raucous cheers when he delivered the line "Barack Obama has failed America." With such an assertion, it is important to imagine an alternate universe where President Romney was sworn in as the 44th president of the United States three years ago. What would Romney have done so as to not fail us like Obama has? Well, for starters, he apparently would not have implemented a health care reform bill which included an individual mandate, expanded Medicaid, and utilized exchanges, much like he did in 2006. But at the request of FXD, we will leave that aside.

Regarding economic policy, two of President Obama's first major pieces of legislation were the auto bailout and the stimulus package -- both opposed by Romney. "Let Detroit Go Bankrupt," wrote Romney in a New York Times Op-Ed. Romney asserts that "if General Motors, Ford, and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye." Oh, really? Later, in the summer of 2009, the Obama Administration decided to prop up the auto industry in exchange for fundamental restructuring. Since then, the industry has regained its footing, the bailout has cost much less than anticipated, and according to Secretary Geithner in his recent Washington Post Op-Ed, it saved roughly one million jobs. Confronted with the facts, Romney has engaged in an all-too-familiar display of flip flopping. Regarding Obama's auto bailout, Romney's spokesperson claims that "Mitt Romney had the idea first." To be fair, many of the ideas described in Romney's opinion piece found themselves into the eventual Obama package, such as the requirement for restructuring. But the crucial aspect -- the propping up of the auto companies with Federal aid which Romney allegedly opposed-- helped the companies stay alive during their restructuring, saving, in Geithner's estimate, roughly a million jobs.

Moving on to the stimulus, Romney favored a plan with tax cuts, and limited spending on "essential" projects. In looking at Obama's Stimulus, we find that $260 billion went toward tax benefits, while $202 billion went to contract, grant, and loan programs. Of the various programs, the vast majority (over $162 billion) went to education, transportation, energy/environment, infrastructure, and housing. Are they essential enough, Mr. Romney?

Rounding out the rest of the stimulus is the $184 billion directed toward entitlements, the majority of which supplied Medicaid and unemployment insurance with funding. Without these funds, scores of jobless Americans would have been unable to subsist for very long. Wouldn't our President have failed America, as Romney claims Obama has, if he let the unemployed go without medical care and without enough money to put food on the table?

To be sure, the stimulus package passed by Congress and signed by President Obama was a vastly insufficient response to the economic cataclysm America faced. Despite this, the Congressional Budget Office, a non-partisan federal agency which analyzes economic and budgetary data, estimates that the stimulus package saved anywhere from 1.4 to 3.4 million jobs.

It's safe to say that Romney's plan, given its' smaller scope consisting of tax cuts and modest temporary spending increases, would not have been as successful. It's not clear how Romney's stimulus would have brought about recovery, aside from his claim that permanent tax cuts would act as an economic panacea. But lets assume, for a moment, that had Romney been in office, our President would not have "failed us," and the economy would be turning upwards as I write this column.

So in this alternate universe, the economy has regained traction, and addressing the federal budget becomes issue Number 1 for President Romney. How exactly does Romney plan on reconciling his permanent tax cuts with a balanced budget? The answer hinges on "regain[ing] control over...entitlement spending on programs such as Social Security and Medicare." To be sure, these two programs will be giant fiscal burdens in the future if they are not reformed, but won't the burden be increased by less revenue? Of course they will be. But again, much like his health care hypocrisy and his bailout blunder, we will move on.

When analyzing the two, Romney's proposal for the future sounds strikingly like Congressman Paul Ryan's budget plan. No wonder, then, that Romney has voiced his support for the Ryan Plan. Both plans hinge on cutting taxes and overhauling Medicare. Mr. Ryan proposes to do this by turning Medicare into a voucher system. In essence, the Government will give coupons away to the elderly so that they can fund their own medical care. The amount the Government allots is pegged to general inflation, which moves at a much slower pace than rising medical costs.

The important take away here is that the Ryan Plan, which President Romney would pass if he were in office right now, does nothing to control costs; it merely cuts off access. There will come a time in the not-so-distant future, when the vouchers given out under Ryancare/Romneycare 2.0 will not cover medical costs for our elderly population. When this happens, millions will be unable to pay for their most basic medical care as they age. The thought of denying our elder population of health care is unconscionable to me. But even if one were to take it as a necessary evil for the sake of our fiscal security, there is one giant obstacle: any system that cuts off care to the elderly will never last.

The elderly population votes in the highest percentage of any cohort, and once their healthcare starts to run out, they will go to the polls. And they will flock there in droves. Political pressure will mount and before long either the vouchers will increase or Medicare as we know it will be reinstated. There is no way around it: an aging population will not allow its health care to be taken away (which is the reason why Ryan starts the voucher system only for those currently under 55). For true reform of Medicare, cost controls must be implemented within the health care system. President Obama has recognized this by containing costs via his health reform bill and by appointing the Health Care Advisory Board, which will study ways to cut costs in Medicare.

Romney's support for the Ryan budget and his pledge to immediately repeal the Affordable Care Act demonstrate that the former Governor does not fully grasp what it takes to balance the federal budget in the long run. And in the short term, it doesn't appear that we would be much better off had Romney been living at 1600 Pennsylvania Avenue these past three years. With no auto bailout, and a much smaller stimulus package the American economy would have been much worse off. Millions more would be jobless now, cut off from unemployment insurance and with limited access to healthcare. Now that is an alternate reality where leadership would have failed America, with Mitt Romney - not Barack Obama - to blame.

Don't Count Out Romney

For the record: Although GOP front-runner Mitt Romney may seem entirely hypocritical for promoting a universal health care plan while governor of Massachusetts, it is time to move forward (Romney already dealt with this grief throughout the 2008 campaign) and realize that, at this point in time, the United States government has a much greater need for economic rather than social reform. Of course, both are pressing issues, but the budget deficit, debt ceiling, dismal economic data, and end of QE2 are more worthy of our immediate attention and efforts. President Obama has done a poor job in repairing and restoring our nation's economy, and the markets' reaction this week to housing, joblessness, and manufacturing numbers is simply a microcosm of a larger failure. Romney's incredible tenure with BCG, Bain & Co., Bain Capital, and the Salt Lake Olympics Committee has armed him with the business acumen necessary to solve complex economic issues, and time is of the essence: "I've never seen an enterprise in more desperate need of a turnaround than the U.S. government," said Romney to the Huffington Post. Romneycare was somewhat hypocritical. We get it. But maybe it's time to consider the benefits of a GOP candidate with the rare ability to, quite simply, make things better.

All Eyes on Goldman

It's never easy being in the PR department of Goldman Sachs. The investment bank, the largest on earth, has been under fire since the earliest days of the financial collapse. Who can forget the infamous Senate hearing last spring, where Senator Carl Levin repeatedly invoked Goldman's own words in claiming that they were knowingly selling investors "a shitty deal?" Two months ago the Permanent Subcommittee on Investigations released its findings on the financial crash, Wall Street and the Financial Collapse: Anatomy of a Financial Collapse. In the nearly 700 page report, Goldman takes a leading role. The report chronicles how Goldman bet against the mortgage market while actively selling their investors securities that they suspected would decrease in value. To many this is to be a conflict of interest; to Senator Levin, a breach of the law.

In calling for Goldman's prosecution, Sen. Levin claims that, "In my judgment, Goldman clearly misled their clients and they misled congress." Citing Levin's report, Rolling Stone's Matt Taibbi, in his expose"The People vs. Goldman Sachs," has called for the Justice Department to step in. In the article, Taibbi interviews former New York Attorney General, Elliot Spitzer, who made a name for himself as the "Sheriff of Wall Street" by prosecuting Wall Street CEOs in the void left open by an inactive Federal Government. When asked what he would do if he were still Attorney General, Spitzer replied "once the steam stopped coming out of my ears, I'd be dropping so many subpoenas."

Despite such sentiment, the Federal Government has been loathe to act. Spitzer's words, however, did not fall on deaf ears in the Empire State. As reported in today's DealBook, the Manhattan District Attorney, Cyrus Vance, has issued subpoenas for Goldman, resulting from the Levin Report. To make matters worse for Goldman, this summons comes on the heels of an "exploratory meeting" with the New York Attorney General's Office which occurred only two weeks ago.

Turning our attention to the markets, after the story broke, shares in Goldman dropped down to $132.04 before stabilizing at $134.38. Despite its rally, Goldman ended the day down $1.79 from closing on Wednesday. Today's losses, although small, are indicative of a larger trend in Goldman recently. The firm's shares are down from $170 in January, and from $140.73 at the end of May. It appears the markets -- as well as the legal authorities -- have their eyes on Goldman Sachs.

The Rise of Groupon

On the days leading up to its recently-filed (and soon-to-be heavily oversubscribed) IPO, Groupon's success since its 2008 origins has been on my mind. To me, it is clear that the ingenious start-up thrives on simplicity--at least on the surface. Of course, hard work and exhaustive marketing campaigns have had an incredible impact on the attraction of subscribers. Nevertheless, CEO Andrew Mason (Mt. Lebanon, PA native and Northwestern graduate) has designed a service that cuts right to the point: savings. Upon entering in the URL, signing in, and choosing the relevant location, users are greeted with the "featured deal" of the day, with the option to view all other deals in the vicinity. Clearly Groupon's partnerships with flagship brands such as Old Navy and Crate and Barrel help attract the frugal consumer, but, perhaps more unique is the start-up's relationships with local businesses, many of which lack a web presence. Such a local flavor adds a sense of discovery to the coupon service; I personally have learned of fantastic local establishments via their deals posted on Groupon. I can only hope that the planned $750mm IPO (led by MS, GS, and CS) will provide more than an artificial, ballooning valuation.

Breathing Room for Borders?

Searching on Google Finance is all it takes to realize that Borders Group stock trades under the symbol BGPIQ.PK, a ticker format less-known to the general equity investor. As it turns out, Borders common stock ceased trading on the New York Stock Exchange on February 15, 2011, immediately after the company filed for Chapter 11 protection under the US Bankruptcy code. Throughout the lengthy Chapter 11 proceedings, Borders shares are traded on what is known as the Over-the-Counter Bulletin Board, or OTCBB, as well as on what is known as the Pink Sheets--all ticker symbols for companies still engaged in the bankruptcy process include an added "Q" at the end of the letter combination. Other suffixes are added for companies in other forms/stages of financial distress.

OTC Pink, known by distressed equity participants as "the speculative trading market," has no financial standards or reporting requirements; this comes in stark contrast to the SEC's stringent securities rules. The company responsible for managing the OTC Pink platform is formally known as OTC Markets Group, Inc., or informally as "Pink Sheets." According to the SEC, OTC Markets Group, Inc. is not an exchange, but rather a private company "that simply facilitates the exchange of securities between qualified independent brokers." Of course, investing in distressed equity is an extremely risky proposition, as a bankrupt company's plan of reorganization typically involves the cancelling of all outstanding equity shares (recall that common stock sits at the absolute rock bottom of the entity's capital structure, and paying senior/sub secured/unsecured debt holders is the top priority).

Judge Martin Glenn of US Bankruptcy Court in Manhattan has recently extended Borders' period of exclusivity, giving the troubled bookseller until October 2011 to file a reorganization plan, and until December to officially solicit votes from creditors. This extension will provide the company with time to talk with private equity firms interested in buying a share of the company's operations. Most recently, Los-Angeles-based Gores Group has offered to buy at least half of Borders remaining stores out of bankruptcy (200 have already been closed as part of the reorganization plan), according to DealBook. Importantly, Gores Group should be "used to working with distressed investments," as the brother of founder Alec E. Gores, Tom Gores, heads a tremendously successful turnaround-focused buyout shop. This sort of restructuring expertise should prove invaluable to a bookseller who struggled to adopt the game-changing e-book technologies (as successfully implemented by competitors B&N, Amazon, and Sony). It will be interesting to see how and when Borders will emerge from Chapter 11 protection--the saga is far from over.

Good Luck, Nokia

November 9th, 2007: At the middle of this day's trading just a few years ago, Finland-based Nokia Corp.'s (NYSE:NOK) share price reached an all-time high of $42.22, settling to close at a solid $37.94. Since then, the story of once-market-leading Nokia has been one of tragedy and failure. Eerily, just four days prior to NOK's historical peak--on November 5, 2007--Google's (NYSE:GOOG) Android distribution was first released. Few analysts could have predicted the impact that Google's open-source mobile OS would have on the global smartphone market, let alone NOK specifically.

In terms of valuation, NOK currently trades at approximately 10x earnings (TTM), while the industry maintains an average P/E of 21.73. However, NOK's P/E high of the past 5 years is 37.49, compared to the industry's multiple of 56.71x. Clearly, the comps don't tell the whole story: as of market close today, shares traded at a measly $6.69, on heavy volume. The stock experienced a 14% decline on Tuesday, and another 5% decline today. Its outlook is cloudy at best. Analysts agree, as many have downgraded the stock from neutral to sell or underweight since February 2011.

In an article by Christopher Lawton and Amir Efrati in today's Wall Street Journal, the authors recount the problems at Nokia as a result of Android's tremendous progress and popularity. One of the most telling statistics involves NOK's market capitalization. As of today's after hours trading, Nokia has 3.80B shares outstanding, and maintains a share price of $6.67, equating to a total market cap of $25.346 billion. Shockingly, as noted in the WSJ article, many telecommunications analysts predict that Apple's (NASDAQ:APPL) net profits in 2011 alone may exceed this number. With the incredibly popular iPhone 4 (and with the iPhone 5 slotted for a September 2011 release), competitors should fear Apple's growing dominance in the smartphone market. Its other products aren't doing too poorly, either.

Equally as shocking is the fact that Nokia still possesses the title of the world's largest handset maker by volume. This is mainly due to Symbian's market dominance in Europe, which makes up a large percentage of the global market. However, the percentage of smartphones running Nokia's OS has declined from 40 to 21 percent YTD, while Android devices "ran on 34% of devices, up from 8% a year ago." This is an incredible statistic for the folks at Google, and a dire harbinger for NOK investors.

Simply put, Nokia's chief executive Stephen Elop will not be able to decrease the gap between his company and its chief OS competitors, Google and Apple. Furthermore, handset makers HTC Corp. (as well as Sony-Ericsson and Motorola Mobility) have produced elegant, innovative and state-of-the-art handsets, the majority of which boast Google's powerful and streamlined OS. Nokia quite frankly isn't even on the map of smartphone players in the United States (in terms of handset quality and capability). The combination of sheer creativity and unparalleled technological development at both Google and Apple (a combination ingrained in the companies' respective cultures) will ultimately prove an insurmountable challenge for Elop and Nokia.

One final note: NOK's partnership with Microsoft and WP7 is a step in the right direction. But is it enough to turnaround such a troubled company? If you can't beat them, join them. For Nokia, though, the "them" seems to be Google and Android, not Microsoft. Market research analysts predict that WP7's market share will reach only third place at 16% by 2016. Thus, the Seattle-Finland relationship will not suffice.

Debt Ceiling Do-Si-Do

Last night, just as the political world was obsessing over "Weinergate" and the circus that is Sarah Palin's "family vacation," Washington DC engaged in another act of political theater: the House vote to raise the debt ceiling. The final act of this circus, however, unlike some of the more trivial stories that pass for "news," will determine the health of our nation's -- and the world's -- economy for years to come.

Back on May 16th, the United States hit its debt limit, and since then, the government has been forced to implement "extraordinary measures," to ensure that America remains solvent. These measures can not go on indefinitely, however, as they expire on August 2nd. The clock is ticking.

And how does Congress respond? By bringing up a bill that, by admission of its one of its own authors, Rep. David Camp, "will and must fail." Why introduce a bill with the intention of ensuring its failure, one might ask? The answer: to demonstrate to President Obama the lack of congressional support for raising the ceiling without enacting budget cuts to go along with it. But haven't we seen this saga play out before? Back in April, President Obama and Speaker Boehner agreed at the 11th hour to a compromise which cut $78 billion from the President's proposed budget. Given that the budget was passed by members of congress, it makes no sense that these very same people are now speaking out against the natural, and logical, outgrowth of their piece of legislation. In essence, the American economy is being held hostage by those in congress who, unsatisfied by the April cuts, want to squeeze more out of the federal budget.

And the American people are outraged, right? Wrong. As evidenced by a recent Gallup Poll from May 13, nearly half the US population is against raising the debt limit. Only 19% are in favor of increasing the ceiling, while 47% are against it. Straddling the middle, are the 34% of Americans who "don't know enough to say." At least they are being honest with themselves. For, if the 47% who are against raising the debt knew enough to form a rational opinion, they would either revise their answer or acknowledge that their wishes, if granted by congress, would result in economic calamity.

If Congress does not increase the limit by August 2nd, when the Treasury's "extraordinary measures" expire, Geithner and Obama will be forced to choose between two very dire options. They may decide to default on the national debt for the first time in our nation's history. This would result in skyrocketing interest rates, and could lead to a credit crunch which plunges the world into its second financial collapse in the past four years. Imagine someone who recently developed a mean case of acute asthma, who is barely recovering from the most strenuous asthma attack recorded in, say, 80 years. When he finally begins breathing again with deep, but wheezy breaths, he takes a harsh body-blow, knocking the wind out of him. How long will it take for him to recover, if ever, and at what cost? For the obvious reasons, this result is unthinkable.

In light of the consequences of default, we must turn to option 2. If the government wishes to honor its debts, it must drastically cut federal spending by $4 billion dollars a day, or roughly $125 billion every month. These billions can come out of anywhere from federal salaries, Social Security and Medicare payments, or soldiers' pay. Within 8 months, these cuts will have sapped a trillion dollars out of an economy that is already sputtering -- the equivalent of cutting off our asthmatic's air supply.

In realizing the dire consequences of not raising the limit, it is disheartening to see the political games that surround such an important vote. This may cause one to lament that our elected officials are more interested in dancing in a debt ceiling do-si-do, than actually engaging in governance. Looking back at the political history of our country, however, it is comforting to see that there was once a time when these partisan charades did not surround congress' vote on the debt ceiling. Congress' process of appropriating funds had always been a redundant two step process: passing the budget, and then authorizing an increase in the debt ceiling to allow the already agreed upon money to be spent. Between the years of 1979 and 1995, however, there was a brief respite from this strange, redundant system.

As chronicled in the National Journal's "This Guy Once Fixed the Debt Ceiling Problem," Congressman Richard Gephardt, under the tutelage of Speaker Tip O'Neill, combined the two votes back in 1979. When a budget was passed, the debt ceiling was automatically raised to accommodate the increase in appropriations. This system held strong until incoming House Speaker Newt Gingrich separated the two votes, when the Republic Revolution rolled through the House in 1995 . In the words of Gephardt, the two-vote system is "silly because it's just grandstanding...it's a facade; it's not real. If you're real, you vote for budgetary and spending decisions that would balance the budget"

Despite the obvious silliness of the two-vote system, it has remained intact for the past 16 years. And here we are, two months away from insolvency, because many of our politicians prefer to play games with our economy, dignifying the ignorance of some of their constituents, rather than engaging in responsible governance. Today, in response to last night's legislative charade, Geithner's Assistant Secretary for Financial Markets, Mary Miller, released a statement. In it she reaffirmed that, come August 2rd, the United States will face "catastrophic economic and market consequences" if Congress does not act. Let's hope congress gets the memo. Finally.

Looking ahead...

Needless to say, I am excited about the future of Pennyon. MJG and I do not yet have a definite "start" date, but plan to fully commence daily postings by the end of June. At this point, there is no concrete thesis or template to which postings will adhere; rather, we are responding freely and without restriction. In this way, we hope to gradually narrow the scope of the entries.