Despite turbulence, a strong September and third quarter

Despite economic and political turmoil, markets performed well across the board in September, with almost all asset classes showing strong returns, reversing many of August’s losses. This also resulted in positive overall quarterly performance.

http://www.youtube.com/watch?v=5VKmPGILHLo&list=TLbMy8cCokDYIW7qOXu7rvZZppk8O7iqwG  

Since there’s really no movement in the DC stalemate, I thought I’d highlight some good news today. I continue to keep an eye on the government, and the risk grows daily. At the same time, though, it’s important to remember that there is life beyond the Beltway (for those who don’t know, that’s the highway surrounding Washington, DC) and that the real economy is actually doing pretty well. Even as DC stares and Wall Street trembles, Main Street has some news to be glad about.

1. Initial jobless claims remain quite low, at 308,000.

With the government shutdown entering its second day—and apparently no negotiations under way between the Republicans and Democrats—the prospect of an early compromise agreement doesn’t look good. A headline in today’s Wall Street Journal, “Capital Digs In for Long Haul,” pretty much says it all.

The markets yesterday seemed to shrug off the shutdown. Much of the commentary has been along the lines that the shutdown is no big deal, a compromise will certainly be reached, and this is actually a buying opportunity. That may end up being the case, but I think it makes sense to at least consider the other possibility: that the stalemate continues until the Treasury runs out of accounting tricks to avoid the fact that the government is now at the debt ceiling, which should be in the next couple of weeks.

For the first time since 1995–1996, the U.S. government has been shut down in a dispute over the federal budget. Now that it has happened, we can start to assess the damage, as well as evaluate how the dispute is likely to play out.

Before we do, there are a couple of important things to keep in mind. First, we made it through the 1995–1996 shutdown, and we will make it through this one. Second, although there will be damage, it will be limited. Just as with the sequester spending cuts, the damage will be absorbed and the economy will return to growth. This too will pass.

“In spite of the cost of living, it’s still popular.” — Laurence J. Peter

Here we go again. I’ve written something to that effect several times over the past couple of years, what with the 2011 debt ceiling debate, the 2012 fiscal cliff, and now this. Governmental dysfunction has been normalized.

The phrase that comes to mind is “defining deviancy down,” from a 1993 paper by Daniel Patrick Moynihan, one of the great statesmen of American politics. The idea is similar to the boiled frog theory I described last month: with every ratchet down in behavior, the new low becomes somehow normal, and any subsequent changes are perceived as being less bad (compared with the new “normal”) than they would have been otherwise. Another way to describe it is a behavioral downward spiral—that is, behavior that formerly would have been thought absolutely disgraceful is now seen as somewhat embarrassing.

As discussed in the previous installment in this series, adjustments are at the core of the debate about inflation, but another way to look at the problem is to consider exactly what’s being measured here. Substitution, of one type of good for another, is a clear case of something being different. What about when you’re talking about the same item, though—say a TV set? Is an HDTV with a flat screen and built-in Internet access the same as an old tube TV without a remote?

These adjustments—for quality, utility, or both—are known in the trade as hedonic adjustments. Again, Shadowstats leads the charge against the current adjustment method, using government-mandated gasoline additives as the poster child for fraudulent adjustments. In its response, the Bureau of Labor Statistics outlines its methodology and gives two examples: a candy bar, which is selling for the same price as before but now weighs half an ounce less, and a TV, which is now available only as an HD model at twice the price. Is an adjustment necessary? If yes, how should it be calculated?

I have to be honest: I’ve been putting off writing about this for the past couple of days, for both good and bad reasons. One good reason is that, really, there hasn’t been much news. Congress is playing games, everyone is shouting at each other, and nothing is getting done. The other good reason is that there’s not much we can do to prepare, given the level of uncertainty that prevails. No news, no action items, no need to comment.

The bad reason I have for putting this off is that, quite frankly, it’s depressing. We’ve been through this before, in both 2011 and 2012, and the fact that we’re going through it once again is just ridiculous. Be that as it may, though, here we are, so let’s deal with it.

“I gather, young man, that you wish to be a Member of Parliament. The first lesson that you must learn is, when I call for statistics about the rate of infant mortality, what I want is proof that fewer babies died when I was Prime Minister than when anyone else was Prime Minister. That is a political statistic.” — Sir Winston Churchill

There are three significant criticisms of the Consumer Price Index (CPI) methodology. The first is that the substitution of items in the basket of goods is not appropriate (the “hamburger versus steak” argument). The second is how to account for changes in the quality of goods sold. The third is the use of rental equivalence to measure housing costs and their contribution to the CPI.