July 25, 2011 – Bring Back the Smoke Filled Rooms


2) Bring Back the Smoke Filled Rooms. I write this from poolside at the historic Claremont Hotel in Berkeley, California. The weather couldn't be more perfect, and the local beauties, many coeds on summer break from the university, are strutting their wares, or the lack thereof. It is shocking what some people will tattoo on their bodies these days, and where they will do it. The blue sun umbrellas array themselves around the water like a postmodern impressionist painting.

I am sending out the letter late today in the hope that I will get some insight into the debt ceiling negotiations before the markets open. So far, no joy. The (SPX) opened down 15 points in Asia, oil is tanking, Treasury bonds (TBT) are getting beat up on a prospective downgrade, and Uncle Buck is getting mugged. Fortunately, my long in equities is partially hedged by my short on the bonds. Is it possible that I have underestimated the stupidity of congress?

In days of old, when such impasses presented themselves, Speaker of the House, the rosy cheeked Tip O'Neil, would meet his counterpart in the Senate for a night of poker. Several bottles of Scotch later, a deal would get struck, and the two would be photographed together shaking hands the next morning, talking about the good of the country. The process moved on.

That doesn't happen anymore. Speaker John Boehner is new at the job, with a mere six months in the post, and he is learning through trial and error, mostly the latter. He is up against a world class constitutional law professor. I can't imagine Boehner playing cards with Harry Reid, Obama, or anyone.

Even if he does come to an agreement, it is unlikely that he can make it stick by getting his own party to follow him. Many of the new junior house members are from the Tea Party, whose understanding of economics, financial markets, and the law making process is shaky at best. In another six months they have to start campaigning again, going to their supporters and financial backers with a list of what they have achieved. Raising the debt ceiling is not on that list.

If Tip O'Neal faced recalcitrant members of his own party, he would threaten a cut off of all pork barrel projects in their district, banish them to the least popular committees, and kill any bill they brought to the floor. But at least if Tip cut a deal, you knew he could deliver the votes. Today, rebellious republicans won't even take a call from Boehner, who view him with almost as much hostility as they do Obama.

What we are seeing here is sausage making in public, in all its odiferous ugliness. It is negotiation out in the open, never a good idea, especially when both sides believe the other is doing so in bad faith.

All of this leads us to bemoan the passing of the Reagan republicans, who you could work with and get a few laughs along the way. It also means that the volatility that I promised you last week will be arriving by the boatload in coming days. I still believe a deal will get made in the coming nine days, so I will use the sharp dips to add selective risk exposure. Watch this space.