I took down a tree over the weekend, using a handsaw, branch cutters, and a ladder. I had to do it piecemeal, one branch at a time, as it was right next to my house. That’s a lot of work, and I was sweating hard by the time I got down to the main trunk and had dragged the rest of the tree to the back yard. Yesterday, when I was cutting down the remains for disposal, the weather was a lot colder. A sweater, a fleece, and gloves weren’t keeping me warm. It was a big shift from one day to the next—but hey, I live in New England.

The change in the market weather hasn’t been nearly as quick, but it has been even more pronounced. Taking a look at the market over the past couple of months, it’s clear that the narrative has changed, which probably portends continued strong performance.

The real news from yesterday is, of course, that the Boston Red Sox won the World Series at Fenway for the first time since 1918. Nothing else even comes close. End of post.

I’ve written before about the potential problems lurking in the financial system. LIBOR, for example, was something I started covering last year. Looking at the papers today, though, even I am surprised by the sheer number—not to mention magnitude—of the problems that are showing up.

In just one of today’s papers, the Wall Street Journal, we have the following articles:

• A1 – “SAC to Plead Guilty to Securities Fraud”
• C1 – “Rabobank Is Fined, CEO Is Out in Libor Settlement”
• C1 – “Troubles for J.P. Morgan in Its Effort to Settle”
• C3 – “Currency-Trading Probe Gains Momentum”
• C4 – “NASDAQ Glitch Prompts Trading Halt in Some Markets”
• C16 – “European Banks Trapped in Legal Limbo”

While rushing between planes yesterday, I had a good conversation with one of our advisors, who was preparing a talk for his clients about whether the recovery is real. Specifically, he was concerned about the fact that money velocity is so low.

Part of the problem with the government shutdown was that many of the economic reports we rely on were collateral damage. In the absence of data, everyone (including the Federal Reserve) has been flying blind. With the government back at work, the catch-up process has begun, and the September employment data was released this morning, giving us our first look at the effects of the (then looming) shutdown. A number of private data points have also been released since then, so I think it’s now possible to start to consider the economic damage.

The news on employment is not good. Total nonfarm payrolls were up by 148,000—much less than the expected 180,000 and well below the previous month’s figure of 193,000, which was adjusted up from 169,000. On the face of it, employment growth took a real hit here. While we can’t make too much of one month, the magnitude of the decline, combined with the fact that it took place before the shutdown, suggests that the actual shutdown damage will be worse. Both the unemployment rate and underemployment rate did drop slightly, from 7.3 percent to 7.2 percent and 13.7 percent to 13.6 percent, respectively, but even that news isn’t particularly positive, as the drops weren’t driven by job gains but by changes in the workforce.

In the past 24 hours, I’ve had several discussions that centered on the question “What do we do now?” During one, on Fox Business News yesterday afternoon, the anchor pointed out that, even as I was cautious on equities, the market had climbed a wall of worry all year—and looked likely to continue to do so. Does that make caution on equities wrong? Similarly, I was talking with a Wall Street Journal reporter this morning about where the market was going, and we got into the continuing government confrontation, earnings, and the real economy—all without coming to any real conclusions.

First things first: The fact that the market keeps going up doesn’t mean everything is all right. Under that standard, the housing market was perfectly fine in 2007, so I don’t think the fact that the market is rising means caution is inappropriate.

Recently, I was invited by the CFA Institute to contribute some thoughts to a discussion about why the Fed doesn’t forgive the debt. My commentary was published, and I’ve received some very nice feedback on it. You can read it here.

I’ve spent quite a bit of time over the past couple of days talking with advisors about the potential consequences if the government doesn’t make a deal in time. Yesterday, I did an interview with Chuck Jaffe of MoneyLife Radio that focused on exactly that. As we move closer to the supposed drop-dead date—that would be tomorrow—I thought it would be useful to look at how I’m thinking about investing.

First of all, let’s hit a couple of points I’ve made before. In the longer term, the events of the next week or so will not be significant. The U.S. economy is diverse, solid, and set to outperform for at least the next 20 years and probably more. Markets will reflect that growth, and, longer term, you absolutely want to be invested here. At the same time, current valuations are at the very least not cheap, and it’s been some time since we’ve had a correction in the U.S. stock market. Quite apart from the current situation, we are overdue. Again, this isn’t to minimize what might happen, simply to put it in context.

Over the weekend, I traded e-mails with one of our advisors, who pointed out that I hadn’t yet done a complete explanation of the situation in Washington, DC. Sure, I’d touched on various aspects of it, but I hadn’t really looked at the thing as a whole. So here’s my take. Thanks, Alex, for the great idea!

The Big Picture

As we move into the second week of the shutdown—and another day closer to running out of room to maneuver around the debt ceiling—cracks are starting to appear.

On the political level, there’s an apparent disconnect between a White House potentially willing to accept a short-term rise in the debt ceiling and a Senate holding out for a longer-term deal on the Democrat side. In the Virginia governor’s race, the Democrat appears to be gaining an edge from the shutdown. The Senate Democrats are talking about passing a clean continuing resolution themselves, rather than waiting for one from the House Republicans—who have been taunting them about their unwillingness to force Democrat senators to make a potentially tough vote. In short, we’re seeing the usual political circus.