VIX plunges under 14. Mr. Market banishes all thoughts of bear.

This has been an extremely dramatic decline, from 22 to 13.9 in one trading week.

Previous drops under 14 in recent years have been followed by limited upside in stocks and an increased incidence of significant declines.

This week’s action seems to be based on relief that Congress has come to terms on the budget. Never mind that taxes are going up for everyone (payroll tax “holiday” ends), and that no progress was made on spending, not even so-called “cuts” to the rate of growth.

Side note on the budget:

High inflation remains baked into the cake for the coming years, just as it appeared in the later years of the secular bear markets of the 1910s, 1930s-40s, and 1966-1982. This is not just because the government is running trillion+ deficits without end, because the Fed has tripled its balance sheet and the monetary base in just four years.

When enough bad debt has been written off for lending to start back up in earnest, the upswing of the multi-generational interest rate cycle will have severe repurcussions for the budget. The effects will be greater because the US Treasury is not taking advantage of low long-term rates, but issuing mostly shorter-term notes.

Note that I was a rare bull on Treasuries going into the last debt crisis. That is no longer the case, but I’m not necessarily bearish on them just yet.

Ignore all this supercommittee talk

Today’s ad-hoc explanation of market action seems to be the failure of the US Congress’ “supercommittee” to come up with a deal to slightly shrink the 2nd derivative of budget growth over 10 years. What a joke! Europe was down over 3.5% today – does anyone there know or care about the supercommittee? What about the Russians (-5%) or traders in Hong Kong last night (-1.5%)? There is a deficit of over a trillion dollars a year, and this committe was talking about spending a trillion less over 10 years than they would at the current pace of growth, as if Congress ever sticks to previous budget plans anyway.

Nobody but journalists has cared about this noise, since it is clear that Congress and the executive will do nothing to meaningfully address the budget gap until the bond market forces their action. If we are in another strong wave down in the secular (post-2000) bear market, this will buy the government (and probably those of Japan, Germany, France and the UK) another year or more before interest rates start to creep higher and force defaults and spending cuts. This outcome is inevitable, since the welfare state Ponzi schemes must collapse and screw the later generations of entrants, as in all Ponzis.

So why is the market down today? Because we’re in a bear market, and Oct-early Nov relieved the oversold condition that had built up by the end of September (lowest, longest-sustained DSI bullishness since 2009). Since before it started, I have viewed this rally aspossibly similar to what we experienced from mid-March to late-May 2008. If the corollary holds, we will be back under SPX 1100 by the New Year.

Journalists are lazy and make up explanations for market action without any empirical evidence, always assuming that correlation equals causation. If every day you magically had the next day’s news headlines, I doubt it would offer much if any trading advantage.

Budget madness: Obama proposes 17% increase over fiscal 2010

From Bloomberg:

Feb. 1 (Bloomberg) — President Barack Obama proposes a $3.8 trillion fiscal 2011 budget today that calls for $100 billion in additional stimulus spending and projects this year’s deficit will hit a record $1.6 trillion.

The spending blueprint being sent to Congress for the fiscal year that begins Oct. 1 reflects the administration’s struggle to boost the economy and job growth — both top concerns of voters — while tightening the government’s belt to reduce deficits in the years ahead.

“We’re trying to accomplish a soft landing in terms of our fiscal trajectory,”Peter Orszag, director of the White House Office of Management and Budget, said in a briefing.

What nonsense! How on earth is the nation to benefit from further inflating the ranks of sand-in-the-gears bureaucracies?

The $1.6 trillion deficit forecast for the current year represents 10.6 percent of the U.S. gross domestic product, making it the biggest by that measure since World War II, according to administration figures. The deficit in 2009 was $1.4 trillion.

The White House deficit projection exceeds other forecasts. The Congressional Budget Office has forecast this year’s shortfall at $1.35 trillion. The median of 39 analysts survey by Bloomberg News is for $1.37 trillion this year and $1.10 trillion next year.

I am sure that the actual deficit will come in even higher, because it always does.

Spending Freeze

To address the shortfall, the administration wants to impose a three-year freeze in “discretionary” spending outside of defense and security. The freeze won’t be across-the-board. Some programs, such as education and research and development initiative, would get as much as 6 percent budget increase. The budget is subject to approval by Congress.

What kind of a spending freeze results in a 17% increase in total spending?

Obama’s plan also calls for creating a special debt commission to recommend steps to cut the deficit and tougher budgeting rules in Congress.

The result would be a deficit that declines next year to $1.27 trillion and to $828 billion in 2012, according to a summary provided by the administration. In subsequent years, though 2020, the annual deficit would still total between $700 billion and $1 trillion. By 2020, the publicly held debt would approximately double to $18.5 trillion, according to estimates.

I wonder if those projections take into account the hoardes of boomers entering retirement and running up medical bills? What GDP assumptions are in that equation  (those will be announced later this morning)? What employment assumptions? It is guaranteed that they are absurdly optimistic.

Orszag said the administration intends to slowly phase in its deficit-reduction plans, saying cutting too much too soon might stifle the economic recovery.

‘Selective’ Approach

“The worst thing we could do is act too quickly and throw the economy back into recession,” Orszag said. “But we do need to be starting, and so that’s why you see this selective approach where we are beginning the process in certain components of the budget.”

If back “act too quickly,” this Harvard genius means to cut the budget, that would be the best thing he could possibly do. Productive, accountable, efficient enterprises need this money, not the Federal government.

The increase totals 17 percent once the stimulus package is included, according to CBO estimates. The administration’s plan also calls for 120 program terminations, reductions and other savings it estimates would save $20 billion.

Wow, $0.02 trillion in savings out of a $3.8 trillion bugdet!

It would provide $33 billion in “emergency” funding this year to help pay for the administration’s troop buildup in Afghanistan. Next year, war costs would amount to $159.3 billion. The basic defense budget would amount to $549 billion, which represents a 1.8 increase adjusted for inflation. The Department of Homeland Security would get a 2 percent increase.

The budget has more than doubled from $1.9 trillion in 2001, according the OMB’s historical data.

Do you feel like you are getting twice as much value from the federal government as you were in 2001?

The US is bankrupt. That is a fact. We can’t pay all of our debts, so we should just get it over with an make an honest default. Why burden the economy for years with taxes and capital-sapping debt rollovers when in the end we’ll have to default anyway? This is like continuing to pay an underwater mortgage when you’ve lost your job and you could rent the same thing for 1/3 the cost, except that we could have a far better government for 1/20th the cost.

Start eliminating whole departments like the fascist Germany-style Department of Education, or the Soviet Russia-style Department of Housing and Urban Development. End the wars, abandon the cruel empire and stop occupying the globe (the Japanese have finally had enough of us anyway).

What cannot be sustained, won’t. If only our “leaders” would acknowledge it and do the right thing, the US could be a free and productive nation again (or better yet, group of nations).