1948, Start Of A Rocky Period

Fundamentals: The "baseline" for the US government budget is the trajectory spending will take if Congress does nothing. In other words, the baseline means all existing laws, like ObamaCare, go into affect. The baseline calls for spending to increase by 7% a year for the next 10 years, which amounts to about $45 trillion in total spending.

The baseline is wrong. Consider Obamacare. The pilot programs running in a few states to test ObamaCare are running 90% over projections. The original projections for Medicare in the 1960s also understated the eventual cost by 90%, so there is a historical precedent for these projections to be inaccurate.

But even if the baseline were accurate, the deal being cobbled together in Washington over the weekend only cuts $1 trillion in spending from the baseline over the next 10 years and another $1 trillion worth of cuts is promised through smoke and mirrors. So spending will grow by 6.5% each year rather 7%.

So we need an election with fiscal hawks winning both chambers of Congress to enact real cuts. If the deal over the weekend convinces voters that the problem has been solved and the coming election does not revolve around spending cuts, then it will be very bad.

Long War: Gaddafi apparently has activated tribal elements within the Free Libya Army that are loyal to him, a fifth column. These elements have assassinated the top general of the FLA and have started a small battle around Benghazi, this is FLA territory. As a consequence, the FLA is back on its heels.

The above development is not the end of the world and the FLA is still overall winning the Libya War. However, it is a reminder that the Long War is at the same stage the Cold War was at in about 1948. We are not at a 1982 moment where victory is clearly in sight and the news is so good it powers a bull market over any obstacles.