The markets wrapped up July with the worst week they'd had in a year, and the first week of August was worse. The S&P lost over 11% in the last two weeks as investors sold off and shorted stocks in the aftermath of the debt deal and in the face of growing uncertainty in Europe. The day after the DOW shed 512 points, volatility last Friday was higher than it was the day of the Japanese earthquake. The Dow finished up 61 points after trading in a 416-point range. Both the Nasdaq and the S&P 500 slid lower.

Then...S&P lowered the boom. Last Friday night, after the close, they made good on their threat to cut the US credit rating to AA+ from AAA. Worldwide markets responded negatively as they opened. The Dow lost 634 point on Monday, only to bounce back Tuesday. Correlation is high and investors are overreacting to every piece of news and economic data. I also believe we go higher from here, eventually, but it's going to be a bumpy ride, as evidenced by this (Tuesday) afternoon's wild swings following the Fed statement.

The US Gross Domestic Product numbers for the second quarter were released two weeks ago and were somewhat overshadowed by the swirling debt ceiling debate. The economy grew at a wimpy 1.3% annualized rate for the second quarter, below expectations of 1.6%. But, it was the drastic downward revision to the first quarter GDP, from 1.9% to only 0.4% that stole the show.

Falling oil and gas prices may help consumers in the near term. OPEC has lowered their estimates for global consumption as economies continue to struggle. Stagnant wages and persistently high unemployment means consumers still aren't able to start wildly spending this economy back to life, and less than one month after being assured there was no plan for further quantitative easing, rumors of QE3, and even QE4 are swirling. That'll use up that recently-raised debt ceiling real quick. The president and some staff members are floating another $800 billion stimulus package for "infrastructure." Are those shovels ready yet?

July's employment numbers were better than June's and June's were revised higher, but 117,000 jobs created is still not enough to keep up with population growth. The unemployment rate slipped to 9.1% from 9.2%, but that is primarily because the labor force participation rate declined. The private sector created 154,000 jobs, but government layoffs were 37,000. The unemployment rate has been at or above 8% for 30 months; longer than any time since the Great Depression.

So...we got a debt deal, the country is not going to default, nor are benefit checks going to stop or bounce...why didn't the market rally on the news? First of all, some things did....gold for instance. While the world may be relieved that the country is going to continue to meet its obligations, they still may not be comfortable with the level of debt we continue to carry and the way our politicians continue to deal with it.

To make matters somewhat worse, to combat the trade imbalances caused by our weak dollar, some of our partners are now intervening in their own currencies to decrease their value. Japan and Switzerland have both dropped rates and flooded their markets with their own currencies, making them weaker against the dollar. Can you say "Global Inflationary Pressure?"

Billions and Trillions are numbers most folks can't wrap their heads around. The Federal Budget is $3.8 Trillion and includes $1.65 Trillion in new debt (deficit spending.) Tax receipts are $2.17 Trillion. The national debt is $14.3 Trillion and climbing and the proposed spending cuts in the debt deal total about $38.5 Billion over the next ten years.

A friend sent an e-mail this week that put things into perspective beautifully. Let's remove 8 zeroes from each of those numbers and pretend we're talking about one family's economic situation. The Jones family has annual income of $21,700. The amount of money they will spend this year is $38,200. That means they will borrow $16,500 by taking out loans or using credit cards. They started the year with $142,710 already on credit cards. Realizing they have a debt problem, they decide to make some spending cuts. After two months of arguing, handwringing, crying, name calling, false accusations and blaming each other, the Jones family decides they will spend $385 less...over the next ten years. They publicly congratulate themselves on reaching an historic compromise but privately admit they all hate the decision.

Being overly simplistic, let's assume zero growth in income or spending and zero percent interest on debt. The Jones family will never get out of debt. In fact, they barely slowed the growth of that debt at all. Or, let's assume they stop borrowing completely and put that $38.50 a year toward the debt, which the bank allows them to keep at zero percent interest. They'll be debt-free in only 3,760 years.

Even the $4 Trillion in cuts S&P was demanding only amounts to $4,000/year in debt repayment for the Jones family. As long as they're borrowing $16,500 annually, not including increases still doesn't even have us on a path to a balanced budget, let alone any hope of overall debt reduction. This is exactly why S&P did what they did.

Adding in real interest and inflation only makes the number worse. There are two paths to financial freedom for the Jones family. They need to stop borrowing (balance their budget,) make more money (increase tax revenues) and apply more of what they make to debt reduction. Or, they can declare bankruptcy.

Did Tom just call for a tax increase? No. There is more than one way to increase tax revenues. The simple way is to increase tax rates. If deficit spending is not curtailed, this is not a sustainable solution. An already-weak economy will be made weaker still and at some point there will be no more taxes to collect. The other (preferred) way tax revenues increase is when private industry grows, creates jobs and produces goods and services that folks who are now employed have money to buy. Folks earn more, spend more and pay more taxes.

Can we get real about the so-called debt ceiling for a paragraph or three? It has never been a debt "ceiling." Since it was instituted in almost 100 years ago it has been raised more than 60 times by democrats and republicans alike. It has NEVER kept the government from borrowing or spending more money. In fact, that's exactly why it doesn't work. It is nothing more than a slick way to politicize runaway spending.

The politicians who came up with the idea in 1917 knew exactly what they were doing. The party in power spends money like mad to remain in power. Whenever the debt ceiling comes into play, like during a war or a weak economic period, they are able to force the opposition to help them raise it by threatening to blame them for government shut downs and potential defaults. Sound familiar?

What's worse? The opposition can, and will use the excuse that they had no choice. This is political theatre at its finest, and the debt ceiling is just one of the props. Don't let their fussing and fighting fool you. They are all willing participants in this.

While politicians have proven they can never be trusted with a blank check, the debt ceiling should be done away with, in conjunction with some type of balanced-budget or spending restriction tied to GDP that is not allowed to be changed when we come up short. That will force those who want to spend more to either save up, pass legislation that really stimulates the economy, raise taxes, or make cuts in other areas. Those that want to restrict spending or pay down debt can stand firm in their resolve without the threat of being blackmailed into increasing the country's credit limit time and again.

Recently Warren Buffet said, "I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection." I think he may be onto something. I still think a ban on earmarks any time there is a deficit (and a debt) is a good idea too.

So, it looks like not much is likely to change. Deficit spending continues and the debt continues to grow, unchecked by an elastic debt ceiling. What does that mean for the markets and our clients? I think it means the markets continue to be volatile and reactive to headlines dominated by short-term swings in both directions. Trying to buy and hold stocks for even a few months will be difficult. There are trillions in cash on the sidelines and the institutional money managers are staying there for the most part, waiting for the uncertainly to subside.

That said, corporate earnings are improving and cash positions are strong. Rallies following good news are likely to be short-lived. The debt deal does not wipe out all uncertainty. Part of the deal includes a committee that has some major tax and spending reforms to put before congress and the president before the next election. More uncertainty is not what this market needs right now.

There remains a very real threat of further downgrades as well. Raising the debt ceiling, printing (borrowing) more money by selling more bonds in an economy that continues to struggle is not necessarily anything in which global credit analysts will take comfort. Although we've been calling for it for many months, a rise in interest rates has to occur at some point as the dollar remains weak and inflation has to be kept at bay. Anyone with debt can expect to see it get more-expensive if that happens.

Can't help but mention that if S&P, Moody's and Fitch had exhibited this kind of discernment when they were giving the toxic debt issues that brought about the eventual demise of our housing market AAA ratings we might not be in this mess right now.

Whether the past two weeks has been the beginning of the dog days of summer for stocks or the beginning of another nasty correction remains to be seen. We'll be watching closely, looking for opportunities and trying to minimize the damage. Please call or e-mail if you have questions or concerns.