Six months ago, few would have guessed one of the most left leaning of states would hold the fate of the nation’s healthcare and a super-majority in its hands. But disappointingly, I am far from convinced a GOP win means the end of Obamacare.

I take Pelosi and her cronies at face value when they say they will cram this legislation down our throats at any cost. (I’m paraphrasing her actual words, but we all know that’s what she meant).

I can picture her and Barney Frank feverishly pouring through 234 years of laws, looking for any loophole to twist to their advantage in case Brown receives a concessionary phone call later tonight.

Healthcare and all the ways it will affect your life will be a popular topic for months, if not years to come. The majority of the healthcare sector today is trading in positive territory thanks to the brewing storm in the Bay State. It’s a small prelude of the volatility that is to come.

It is sad to think we only have a couple of more days to cover it all in Notes.

Because we’re operating on borrowed time, I’m going to put off the speculation of healthcare for tomorrow when we know (or at least hope to know) Massachusetts’ decision.

For now, let’s stick with what we know for sure.

One thing that is 100% going to happen is, in just a few weeks, Obama is going to unveil his latest budget proposal. In it is going to be increased defense spending (which I’ve already covered) and also decreased fiscal dedications to NASA.

Instead of giving cash directly to the top space agency, Obama wants to embrace his capitalism roots (there’s a line you don’t see every day) and give the cash to the private sector.

Now that the space shuttle fleet is up for sale, NASA needs a new way to get its astronauts into orbit. Of course, the big recipients of NASA-based money, Washington cozies like Lockheed Martin, Boeing and Raytheon, are not so keen on the idea.

After all, if NASA outsources the shuttles duties, they stand to lose a long-producing cash cow.

But that’s not the case for companies like Orbital Sciences (NYSE:ORB), SpaceX and Rocketplane Kistler that could be the recipient of healthy government contracts as Obama puts a toe into the private sector.

Unfortunately, Orbital Sciences is the only publicly traded of the three, but with a Street value of less than a billion bucks, it offers investors a shot at a “smallish” space-industry up-and-comer.

There are a couple of arguments against Orbital Sciences.

First, its price tag is inflated. With a trailing P/E of nearly 25, investors have obviously priced in lots of growth potential. But if Uncle Sam starts writing the company a couple extra checks each year, the current bottom line will look paltry in comparison.

But then there are the naysayers that believe the private sector cannot compete with the deep pockets and industry experience of NASA. They cite factors like national security and safety.

While I believe safety and quality is almost always better in the private sector, security is an issue Obama must measure before he goes and cuts NASA’s budget. Space superiority has been a significant ingredient in the country’s defensive success over the last 50 years.

The bottom line is if you’re looking for a place to put some speculative dollars and get your tax dollars back where they belong – in your pocket – than the aerospace sector is worthy of an in-depth look.

Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

Bill pays taxes in Britain, where part of his publishing business is based. But now those taxes are going up. Governments, of course, have to pay for their boneheaded bailouts and ‘stimulus’ packages somehow. And so like the Peronists down in Argentina, they target “the rich.”

The feds – both in Britain and back at home in America – have chosen an easy target… the rich!

In the public mind, ‘rich’ and ‘banker’ are inseparable. Like ‘corrupt’ and ‘politician.’ What’s more, the rich were at the scene of the crime when the financial crisis began. The rich were caught red-handed. It doesn’t matter if the ‘rich’ man earned his money from doing heart operations or selling vegetables. Every rich person is presumed guilty of the crime of the century. “Tax them!” screams the mob. Tax them! Tax them! Eat them.

And so, it will come to pass that ‘the rich’ are taxed. The money will be taken from them and given to… well… the rich. But these will be different rich people – bondholders… bankers… insiders… hustlers and anglers.

This corruption makes Russia a more speculative way to own commodities than say Australia or Canada. But it’s a speculation the market likes right now. Let’s look at Central Europe and Russia Fund (CEE). This ETF is one of the most liquid ways to buy Russian stocks. A big chunk of the fund is in Gazprom, the world’s largest natural gas company. Monster base-metal miner Norilsk Nickel also carries a large weighting.

The bull market in resources has helped the CEE gain 450% in the past five years. As you can see from today’s chart, Russia may be corrupt, but in a world of $130 oil, the market is saying, “Who cares about corruption? Just give me a good commodity play.”

Source: The Corrupt Way to Own Commodities

He upholds the Code of Ethics and Standards of Professional Conduct. She knows why GIPS standards were created and to whom they apply. He has acknowledged his obligation to act in an ethical manner and to encourage others to do the same, acting with integrity, competence, diligence, and respect. The letters CFA indicate that this individual is committed to putting the investor’s interest first at all times.”

This was an ad issued by the CFA Institute. There are more than 90,000 CFAs in the world, according to the website of the CFA Institute which is headquartered in Charlottesville, Virginia.

While browsing through the internet I came across this comment: “None of the star analysts implicated in the Wall Street scandal that led to the $1.4 billion settlement – Merrill Lynch’s Henry Blodgett, Salomon Brothers Inc.’s Jack Grubman, and Morgan Stanley’s Mary Meeker – had the CFA designation, according to CFA Institute records.” Of course, that was written a few years ago so I don’t have any idea if any CFAs were involved in the recent sub-prime and mortgage mess.

The star analysts listed above were research analysts hired by the large broking houses like Merrill Lynch, Salomon Brothers, and Morgan Stanley to cover the then-booming technology and internet sectors. These analysts, investigations indicated, were writing wonderful stories on companies because their employees (the brokers) paid them very well to write stories and not necessarily what they really felt about the companies. So, for example, in one memorable quote one of these analysts wrote, in an internal email, that the company was actually rubbish but, because there was a “transaction” happening, they were writing nice things about the company.

The “transaction” was a reference to a public offering that was due to come out which, when successfully placed with the public and the investors at large, would result in a nice fee for the broking house. And this nice fee would result in a nice bonus for the research analyst writing the wonderful story to support the wonderful IPO.

But – though I am not a betting man, as such – even though there were no CFAs involved in the “star analyst” scandal, I can bet that there were quite a few MBAs involved in that failure and in the recent sub-prime and mortgage crisis.

That’s because of what they teach us (I am an MBA, too) at these business schools. We are treated like the chosen ones, some sort of saviours to mankind’s problems. And we can solve them all in case studies in classrooms. And then, once we have done that we move on to mastering the art of making money. We MBAs are the ambassadors of capitalism – the science of being selfish and looking after our own interest – and sometimes disguised as the interest of The Company – is turned into an art. Capitalism is the given framework and we are taught to worship it. And further its cause. At any cost.

Don’t get me wrong, there are many not-so-rich MBAs out there who believe in ethics and goodness and fairness. But, on balance, all the folks involved in some scandal or the other tend to be MBAs. This could be a sign that it is so easy to get an MBA that anyone who wants it can get it (so the course may not teach you greed and scandalous behaviour but the course selection process does not have the ability to check your background well).

Like a good friend from New York told me many years ago: “The closer you get to the money, the more it stinks”. But – stink or no stink – many of us MBAs are out there hovering around for the kill.

Putting money matters into the hands of most MBAs is like giving a terrorist the key to a nuclear reactor. You know there will be a blow up – it’s only a matter of time. And you know the damage will be huge.

And this is probably true for many CA’s too. In an Indian context, tax avoidance is seen as another version of tax planning. And there are many CA’s in this business. And in the fund distribution business, too. And not all of them act in an ethical or correct way.

So does the university that award the MBA take back the MBA degree?

Does the institute that awards the CA degree take back the CA certificate?

A friend asked me once, what I would do after I stopped spending my time trying to enlighten and educate on money matters. I told him I would like to set up a university where we granted MBAs to students with an understanding that, if they misbehaved, the MBA degree would be withdrawn.

I don’t think many people would enroll in my university; so that may not be a good business proposition.

But, think about it.

What if every MBA or CA degree could be withdrawn and the penalty along with the withdrawal would be a return of all the wealth created from the time the person graduated with the MBA or CA degree.

Knowing the selfish nature of the focus of this twist in capitalism (one with a punishment for a crime committed) chances are that the behaviour of those MBA students would be a lot different.

I doubt the degree holders would sell all those dud mutual fund products; or write glowing reports on IPO’s that are junk; or sit on a panel and tell television audiences how the next IPO their company was leading was going to head into 4-digit numbers very soon.

Come to think of it, if the people who grant the degrees cannot punish the recipients of their degrees, how useful are these degrees?

And if these same people enter the industry of financial services or work with companies that tap the financial markets, maybe SEBI should lay that down as Rule #1: “If you enter this industry and you are caught lying or cheating or indulging in fraudulent practices, we will take away all the wealth you have. And you have no recourse to a court that takes 25 years to decide whether you are guilty or not. Your fate will be decided by a jury comprising of the investors you serviced. If you agree to this rule, stay on in this industry otherwise find employment somewhere else.”

A lot of people would leave this industry in a hurry – this would be an automatic wealth enhancement for most investors! A one-time “exit dividend” followed by the calm and peace of blissful, fair advice.

Think about it – but don’t dwell on it.

Get back to reality quickly.

Because the reality is that every day there are another 100 MBAs hired by some finance company somewhere in the world – and many of them are out to get you!

Source: An Ethical Degree

The “errors” of which the economist spoke were outlined by the late Milton Friedman both in his 1963 A Monetary History of the United States (written with Anna Schwartz) and his popular Free to Choose (with Rose Friedman), published in 1979.

According to Friedman and his coauthors, the economic collapse that occurred in the United States from 1930 to 1933 came about because the Federal Reserve System failed to act in the face of bank failures and banking panics, leading to a massive contraction in the amount of money in circulation, which ultimately led to the calamity.

The anti-free market arguments

Friedman made his arguments as a means to counteract the common explanation of the Great Depression — that it was the result of the “internal contradictions” of capitalism. The typical explanation, popularized by John Kenneth Galbraith as well as the gaggle of Keynesians that proliferated in US universities, was that the capitalist system tends toward “underconsumption” or its evil twin, “overproduction.”

(Galbraith held that underconsumption occurred because the income “gap” between the wealthy and poor grew during the 1920s — another “natural” outcome of capitalism — while John Maynard Keynes and his followers held that private investment spending was volatile because of the “animal spirits” of investors. The system had a built-in, self-multiplying, downward spiral whenever private investors were unwilling to throw more money into the economy.)

Those who blamed the Great Depression on the “failures” of the free market were all too happy to come up with their own “solutions,” including attempts to cartelise the entire US economy or to force up wages via increased minimum-wage legislation or through the endorsement of expanding labor unions.

Some, like Galbraith, went further and advocated out-and-out socialism and central economic planning. The free-market system, they have argued, is too inherently unstable to be left to its own devices. (This is the same argument that Paul Krugman makes twice a week from his perch on the New York Times op-ed page.)

Friedman believed the monetary system was prone to failure

Thus, Friedman was seeking not only to explain why he believed the Great Depression occurred, but he also was trying to defend the free-market system, or at least was trying to defend most of the free market system. There was one portion of the system that was prone to failure, he argued, and that was the monetary system.

This alone is quite interesting, as Friedman was willing to buy into a government-run monetary system — “socialist” money — even as he tended to condemn other things socialist. However, he also was willing to admit that the fractional-reserve banking system (which he heartily endorsed) was subject to all of the instabilities one would expect when there exists a monetary system in which multiple claims are made on a single source.

Nonetheless, I do not wish to dwell on Friedman’s inconsistency. Instead, I wish to look specifically at his claim that the Great Depression could have been avoided had the Fed simply provided enough “liquidity” in the system. This is more than an esoteric exercise, as it seems that Bernanke has taken a page — or, perhaps, a number of pages — from Friedman’s playbook.

The Fed’s latest move — permitting reeling financial institutions to use near-worthless mortgage securities as collateral for about $200 billion in loans — is yet another example of Bernanke’s promise to “provide liquidity” at every step, as though the real crisis here is the lack of play money in the nation’s financial system. The problem here is that the original Friedman thesis was wrong, and that Bernanke’s glorified dropping of money from the Official Fed Helicopter is just as foolish.

The Smoot-Hawley Tariff Act

Murray Rothbard’s America’s Great Depression was first published, ironically, in 1963, but it tells a very different story than does Friedman. Rothbard’s book points out that the economic collapse from 1930 to 1933 did not happen because the Fed failed to provide “liquidity” to the system, but rather because the government intervened in an economic downturn and managed to turn a recession into an out-and-out calamity.

For example, Friedman notes (accurately) that there were more than 4,000 bank failures during this period. He somehow wants us to believe that had the Fed loaned enough money (via the printing press) to enough banks, that we would not have seen so many bank failures. However, he leaves out something that is very important: the passage of the Smoot-Hawley Tariff Act in 1930.

This infamous tariff, passed and signed by President Herbert Hoover despite the pleas of more than 1,000 economists who signed a letter urging him to veto the bill, not only made it nearly impossible to import consumer and capital goods from abroad, but also destroyed the export market for US farmers. Thus, a bill passed to raise production prices ultimately ended up reducing prices for agricultural products.

“Why bother?”

“They think they won’t get it back… But there’s the paradox: the sky is said to be falling…but investors aren’t running for cover.”
First, the news headlines:

The Dow went nowhere yesterday. Gold dropped $5. Oil held at just under $115.

There is also a growing realization that the U.S. economy is sinking into recession (about which, more below…)

Yesterday, we organized our thoughts on the economy into a series of 4 points:

1. There’s a whole lot of ‘flation’ going on.

2. The de-flation takes the air out of housing and the financial industry; the in-flation gasses up commodities, gold and oil.

3. Together, they are re-adjusting the U.S. economy (and, to a lesser extent, the United Kingdom and other Anglo-Saxon economies) downward…reducing the value of assets and labor (more about that too…keep reading), but also reducing the value of their debts.

4. This is fine with us…it’s just capitalism at work.

Last night, leaving the office, we walked by a TV studio. The wind was blowing; it was a spring day in London but it could have passed for January in New York. Still, there was a long line of people waiting to get into the studio.

Further down the street was another line – this one a line of bums and down-on-their-luck street people – waiting for a food truck. One was wrapped up in a sleeping bag on the sidewalk…another was shaking his head at no one in particular.

But here at The Daily Reckoning headquarters, we’ve never seen the line we wanted to join. We’d rather go hungry than wait behind others for a sandwich. And as for wanting to see a TV show…we’d have to be crazy.

We only bring it up to remind ourselves that people love lines. In Russia, before they abandoned communism, if people saw a line forming, they’d get in it…figuring that there must be bread or cucumbers, or maybe a list where they could sign up to buy a car, at the other end. In Paris and London, people wait in line to get into nightclubs. And in America, the line of young people trying to get into Harvard, MIT or Johns Hopkins is unbelievably long.

No, dear reader, count us out. But most people do not like being alone. They don’t trust themselves to figure out what they should do. Instead, they look around and see what others are doing…

That is why financial markets tend to move in such broad patterns. People get in line…share the same sentiments…believe the same things – even when those beliefs are far-fetched or absurd. One day they believe that the world is coming to an end…the next, they believe it will never end. In 1999, we recall that President Clinton remarked, “things could be better.” Now, if you read the papers, you might think they couldn’t be worse.

Sometimes it is hard to know what people are really thinking. Pollsters have found that they often say one thing – often what they think they should say – while they actually believe the contrary. And poets have figured out that they often don’t know what they think.

This subject matters to us because crowd behavior affects prices. When people think the sky is falling, they don’t want to lend money. Why bother? They think they won’t get it back…or won’t be around to enjoy it. Interest rates go up fast. Asset values plummet.

But there’s the paradox: the sky is said to be falling…but investors aren’t running for cover. The S&P is still selling at nearly 20 times earnings. In other words, a person who buys a share is willing to wait 20 years to get paid back out of earnings – if all remains the same. Twenty years is a long time in the stock market. Like dog years, companies measure time in quarters, not years. Only one of the original Dow companies – General Electric (NYSE:GE) – is still on the list. So, a 20-year outlook is fairly optimistic.

Historically, the range of price/earnings ratios varies from about 10 on the low side to 25 on the high side. Anything below 10 is usually a great buying opportunity. Anything above 25 is usually a great selling opportunity. At 20, the market is expensive…but not outrageously so.

What makes us wonder is how stocks could remain so expensive in the face of what appears to be such bad news?

Yesterday, for example, brought more depressing headlines.

“US Economy: Worse than Believed,” begins the Washington Post, citing the Fed’s Beige Book report.

“Offering a picture of [the] US economy being squeezed from all directions, the Beige Book, a compilation of anecdotal reports of US business conditions prepared by the US Federal Reserve, showed economic conditions in the US have weakened almost nationwide in the past six weeks.”

Manufacturing output is down. Construction is down. Demand is down. Business Week points out that statisticians made it look like consumers were spending more than they actually were – by jiggling health care costs. Handled properly, says BW, consumer spending figures would show a drop since last November.

Out in California, house prices have fallen 26%, adds another piece from Business Week.

Rice hit another record high – amid more grumbles from the sweaty mobs.

Australia is ‘drying up,’ adds the International Herald Tribune.

The art market is “bracing for a bust,” says this morning’s news.

Our own MoneyWeek cover story tells us, “Why the credit carnage is far from over.”

And even Harley Davidson (NYSE:HOG) has had to announce cutbacks.

What is this world coming too?

Nothing bad, apparently.

Because people are still buying stocks at 20 times earnings. And they are buying Treasury bonds with yields that are scarcely above the level of consumer price inflation. In short, they don’t think the sky is falling at all.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

According to a report in The Daily Telegraph, “Speaking on a BBC documentary, Mr Soros said that at the heart of the financial crisis was the culmination of a 60-year-old boom in leverage, the result of which will be a far deeper downturn than many expect.”

Read on at Telegraph.co.uk.

Soros predicts the both the financial industry and the indebtedness of the US consumer will have to shrink, causing a “very painful adjustment”.

“Americans used their economic freedom to ruin themselves,” says Bill Bonner.

“Shareholders consented to hundreds of millions in bonuses and stock options for key executives. Investors signed up for hedge funds, willingly giving managers ‘2% and 20%’ for putting quarters in the slot machine for them. Taxpayers allowed huge tax cuts – widely believed to be aiding the wealthy – because they looked forward to the day when they would be wealthy too. And almost everyone, everywhere eagerly went on a spending spree, in the belief that this new, kindler, gentler capitalism would add wealth faster than they could get rid of it. And if they overspent, hyper-capitalism would soon catch up.”