Cut Butter, Not Guns

Charts: Earlier this week the all world index at one point registered a 20% decline from its April highs, nipping into bear market territory. Despite that, the market is not technically driven, rather fundamentals and geopolitics are the driving forces.

Fundamentals: China is trying to ride to the rescue again as the world economy teeters on the brink of a horrific double-dip recession. The Great Dragon is letting its currency rise sharply against the dollar, which will give a boost to American exports and lower the price of oil within China. With lower oil prices, Chinese consumers will spend more and overall imports into China will increase which will help Europe and the rest of the world.

China can only raise its currency by buying less American debt. This means there has to be less US debt hitting the credit markets or interest rates will rise in America, which will force a global double-dip recession. So the Congressional super panel charged with reining in US spending is going to have to really do some cutting and then Obama is going to have to back these cuts. If not, China cannot ride to the rescue.

Also, if the super panel doesn't make real cuts to domestic spending it will trigger automatic "doomsday" spending cuts to the CIA and Pentagon, which will be catastrophic to the Long War and Cold War II.

Cold War II: This week China launched its first ever aircraft carrier for a trial run. At the same time, North Korea shelled the same South Korean island that it has attacked in the past. The North Korean shells splashed into the ocean, but came close to doing real damage. South Korea responded with a heavy artillery barrage, with its shells also falling into the ocean. South Korea had the last word, as its shells landed closer and closer to North Korean gun placements, the North tucked tail and silenced its cannons. These two incidents illustrate how huge cuts to the US Navy aren't really possible. Insiders say China plans on building a fleet of four aircraft carrier battle groups by 2030.

Long War: After SEAL Team 6 lost over two dozen men to a Taliban RPG, NATO and the CIA hunted down and killed the Taliban unit responsible. The next day 5 more US soldiers were killed in Afghanistan. President Obama made a speech saying the US is not leaving Afghanistan after this bloody week of combat. None of the doves in Congress made a peep. Obama did a good job with his speech. But the above incident tells us that huge cuts to the Army, USMC, and CIA are not possible.

If you can't make big cuts in the Army, USMC, Navy or CIA, then you aren't making big cuts to Defense. So the Congressional super panel is going to have to cut butter, not guns, or we're all screwed.