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Waiting On November 6
While I’ve stayed out of commenting on the US Presidential elections and politics in general for the most part, at this point so much is riding on public policy globally that we cannot analyze the markets or economy without taking it into account.
Now let’s first assess the markets.
We know from various sources that there is a coordinated effort to keep things calm until after the US election. Based on this, we can deduce that QE 3 was due to one of two reasons:
- Propping the markets up until November… or,
- Something bad is coming down the pike and the Fed wanted to act preemptively.
It’s really a toss up (or could be a combination of both). There is certainly no lack of major issues that all have negative implications for the markets. Among the more pressing are the threat of a sharp global downturn (China, the EU, and the US are all in recession), armed conflict in the Middle East, and the EU’s ongoing banking and sovereign debt crisis.
In light of this, it’s not surprising that the Fed has opted to get more money into the system. What is surprising however is that it’s turned out to be such a dud.
QE 3 was announced on September 13. Since that time the markets have done a whole lot of nothing. In fact, they are barely up since the QE 3 announcement.
We did see a similar correction for about a month following QE 2 in 2010, however after that stocks hit lift off and didn’t look back:
It’s now been a month since the announcement of QE 3. So, if it’s going to have a similar impact to QE 2 as far as stocks are concerned, the markets need to start roaring higher now.
Alternatively, we could indeed have reached the end game for Fed intervention: a time in which the one positive aspect of QE (namely stocks rising) is no longer facilitated by more buying.
If that is the case, then the markets are in big trouble because the negative consequence of QE (higher cost of living) certainly isn’t being held in check, no matter what the Fed claims
So, the multi-trillion Dollar question is:
- Has the Fed overdone it? Has it finally used up its toolbox to the point that even an open-ended program has little effect on the markets?
Once the Fed decided to backstop the system, there was always the threat of this occurring. You cannot have the capital markets based on moral hazard/ intervention. It not only confounds the very purpose of the markets (aligning capital with opportunity), but it leads to greater and greater dependence on the Fed’s intervention. And at some point eventually the markets no longer respond to the juice.
Can the Fed hold things together until November? I cannot say. But unless the markets start rallying hard soon, then the Fed’s in big trouble.
Now for the politics.
The outcome of this Presidential election will be of tremendous import for both the markets and the economy. During the first four years of its Presidency, the Obama administration has relied heavily on Bernanke’s Fed to hold the system together (remember, it was Obama who re-appointed Ben Bernanke, paving the way for QE lite, QE 2, Operation Twist, etc).
As a result of this, the recovery has been anemic to say the least. I can tell you point blank that the latest spat of improved economic data is not authentic or accurate. I won’t waste time with the methodology (that would take multiple pages of numbers) but I can say point blank that employment has not in fact fallen as the headline number indicates.
Aside from this, the cost of living has increased dramatically while Obama was in office. One can point fingers as for why this is, but at the end of the day, the reality is that Obama put Bernanke back in office and has never attempted to keep our Money Printer in Chief in check.
Thus, our economy has become one of Central Planning: an economy in which the primary driver of things is Central Bank intervention.
So if Obama wins again, there will be absolute hell to pay down the road. The recipe for hyperinflation has always been the same: Government monetization of a massive deficit. The US has run $1 trillion+ deficits for four years now.
Today, the Fed accounts for over 70% of all US Debt purchases. The only reason we’ve been able to get away from this is that the US has not totally lost credibility in the bond markets (yet).
However, to assume that Treasuries will always have a bid is a very dangerous assumption. If we continue down this same path of monetizing the US’s deficit via Fed money printing then at some point we will lose credibility in the markets. At that point the US Dollar will collapse and hyperinflation will hit.
There is no indication that the Obama administration has even considered this eventuality. Indeed, I have not heard anyone on the left refer to Bernanke or the poison of his policies at any point in the last few months.
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Best Regards
Graham Summers
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Phoenix u were wrong on QE3, so why would we believe you that Mormney is somehow good for the US economy?
You are delusional, you should have stuck to making no political comments. The election means nothing, both candidates are the same, unless you're in the online education fraud industry (Republicratards) or the Solar Energy industry (Demublicantards), then maybe you should care.
We're still waiting for you apology on getting QE3 wrong, and classicly, you got it wrong within a month of it being announced.
ZH, get rid of this guy already.
A lot of people forget that the "world is us." Without US the worldwide financial system does not work, the oil does not flow, the other boys and girls in the playground do not play nice or in peace.
We are not exceptional, but we are ncessary and we are here to provide what the world thinks it needs.
Where are the ratings agencies with regard to Europe and this debt mess in the US?...there really shouldn't be much difference between the three and I really don't see a AAA rated country right now unless it is Finland, Iceland or Norway...These agencies are supposed to look into their crystal ball and suggest how likely it is that investors will be paid back in uninflated dollars...getting 3% returns when inflation rages at 8% should get you kicked out of the AAA club in my book
I am not convinced the central planners are that concerned about who wins the election. They will still be pulling the strings, and the puppet-in-chief-of-the-US will dance to their tune whether he is black/white, Dem/Rep. From their macro perspective, it does not matter much. Bernanke might be replaced if Romney wins, but the CPs will simply reload another clone to take his place.
I do not expect major changes in the Big Plan (foreign policy; Iran; Oil; the dollar;etc).
From the muppets view, there is more at stake for items like tax rates, erosion of the Constitution, and whether or not they will have to look at Hilary Clinton's face on the tube for another 4 years.
"The only reason we’ve been able to get away from this is that the US has not totally lost credibility in the bond markets (yet)." Well, yes, that, and the fact that anyone in the media or newspapers refuses to pursue it because most importantly we have to get Obamao reelected and continue our march to totalitarianism and communism. Don't tell me about socilism, we already operate as a socialist state...
DO you seriously believe that Romney is going to stop the Trillion dollar plus yearly deficits? Neither of these two yahoo's (sorry to impinge a halfway decent company) have a clue as to what to do to stop the deficits without completely and totally upsetting the applecart. And both parties haven't got the cahoonies to stand up to the extremists and say enough.
Without both spending cuts and tax increases (not the hide the nuts shell game we have right now) the deficit will continue to rise. Individuals are contributing around 4 x as much as corporations in taxes and FICA isn't going to cover the deficits in that program going forward. We have pissed away any good feeling and are recycling our debt through the FED and saying the sky is clear and the sun is shinning (those are sunbeams, not lightning!)
As many have pointed out, things have been gradually going down, and when the cliff arrives, the drop isn't what kills, it's that sudden stop at the bottom!
I hate to say it but I agree, the ability to stop $1T+ deficits is out of the hands of both party's Presidents. It can only come when marching on Washington occurs and scares Congress and that only comes AFTER austerity is implemented. Romney only differs from Obama in that perhaps war costs go longer than 2014. Anything requiring Congress to act (fiscal cliff (they will push that off repeatedly) repeal Obamacare, add taxes, raise age of SS or Medicare etc.) will be put off until some party messes up and allows the President's party to have control of both houses ala Clinton...can't see it happening in this country anymore.
Earnulf,
Well said.
An analysis from the nonpartisan Tax Policy Center has met with particular scorn as it concluded Romney’s plan is mathematically impossible -- that there simply aren't enough deductions, credits or loopholes in the tax code to offset the cuts for the well-off without wreaking havoc. (Romney’s promise to increase defense spending only complicates matters.) The desire for specificity is hardly unreasonable. Running in 2000, George W. Bush insisted that his proposed tax cut would be a boon to the middle class. Experts demurred, arguing that the top 1 percent of income earners would reap a windfall. Like Romney, Bush declined to show his math. In the end, his 2001 tax cut delivered almost half of its benefits to the top 1 percent and initiated Bush’s march toward a trillion-dollar deficit.
While there is plenty to complain about with regard to government spending and waste, why is it so many people won't do the math and realize that the US government cannot continue to reduce revenue while increasing or maintaining spending? The siren song of the Tea Party is just a figment that is unsustainable in a civilized society. We could, like we do with feral hogs, attempt to exterminate every welfare mother & derelict dad there is, and the budget won't balance without significant cuts in nation building exercises and increases in revenue. I see an Obama future as status quo. I see a Romney future as another disaster similar to the Bush era with rapidly accelerating budget deficits and crumbling infrastructure that resembles third world countries. Our choices are dark & darker...
There are plenty of loopholes...Capital Gains(especially deferred), tax shelters, Trusts. Unless the next guy plans on shutting out the lights he better do something.
Maybe he will, maybe he won't. We know for sure this idiot we have now won't...and frankly I don't want to double down on him. Give me Romney anyday.
And, most importantly, at least Romney will allow people to succeed and progress where as Obama is trying to create more and more zombies. He is a totalitarian.
This whole argument about they're both the same, it always forgets to note that Obama is willing to subvert all we know to get what he wants....and he's doing it. Give him a second term and you'll see what it's like.
Romney will at least want people to succeed and grow...if not to take money from you. Obama wants no one to succeed other than those he decides upon - if you need any more evidence look at GE, Wall Street, the solar and battery companies, the labor unions....all benefitting from stimulus cash..everyone else can get their crumbs from the government. Yum...
Your faith in democracy is almost touching. Do you really think it matters two hoots who's holding the crown aloft come Nov 7th? The plan, the outcome, the process have already been decided - and I don't the mean that notional idea of 'casting your vote' - sure, you can still trot along & feel you're doing/influencing something, I suppose. The enduring PTB have decided, the name of the President doesn't matter a jot, what's been ordained to happen (i.e. the next step, the solution, the hyperinfaltion - dilute to taste..) , will happen.
Romney's proposed budget cuts amount to ~100 billion dollars annually. The deficit is ~1.4 trillion dollars. Not only are his cuts a rounding error but they're based on GDP growth of 4%. Like, lol, dude.
So we know for sure that neither idiot will cut spending in any meaningful way.
We get to pick either a man who fathered Obamacare and supports a permanent ban on scary-looking guns...or Obama.
Awesome. November 6th is going to be "Vodka Day" at my house.
I don't think the Fed is "propping up markets until the election". I think they're "propping up markets as long as they can". We'll see how long that is.
Clearly, if you announce open ended QE, then you're either so deluded that you believe you can prop things up in perpetuity or you've acknowledged that you have limited capacities and you're scrapping QE given its diminishing returns. It is also obvious that Ben is of the understanding of the latter... so, the question then is also binary in nature: is there an alternative program planned or is the FED simply closing up shop? My guess is the former, but how it may take form is anyone's guess... I can't see anything being materially different AND also able to keep velocity in check, but that's not my domain of expertise.
Needless to say, the FED wouldn't have announced open ended QE unless it believed QE was no longer working or had a minimal life left and, all things considered, it could get the most mileage out of the announcement rather than continued action.
If the plan is to deleverage and deflate, then I doubt J6P is going to take it very well having insiders buy up all the toxic sludge from the FED or the GSEs for pennies on the dollar [without J6P getting a chance to buy his own debt].
hey graham,
not waiting for anything new or changed b/4 or after 11/6
remember who the powers are that are really in control? they are not going to be replaced!
good summary of past, but future is somewhat predictable EXCEPT as you say that good ol bond bubble inflating faster and faster. but remeber as the bubble gets bigger it needs expoential amts of new "HOT" air of which there is no shortage, until,
well, the day arrives that the dollar is no longer king.
and, that my fellow realist, could be a long way out.
SHIT SHOW!
Buy the rumor, sell the news.
Markets drift higher until the election and then crater across the board.