Submitted by Vincent Lanci of FMX Connect
Super Complacency Means Printing Will Commence Post-Election
We believe that the Super Commitee’s lack of action portends for inaction by our government until the 2012 election is concluded. We also believe, that no matter who wins the printing presses are gearing up.
Super Duper Committee Needed
The United States is in a morass of political indecision that is hampering our ability to let the right idea bubble to the surface. Yesterday’s failure of the much vaunted SuperCommittee to do anything, a structure empowered to do what is needed to solve the deadlock, has underlined the effect of political indecision as the primary driver behind why we are where we are today. As crazy and inappropriate as it was to downgrade the U.S. partially on the basis of political gridlock…. It was true.
Hippies with Brains
Those “Occupy” people out there are right; it is the politicians themselves and the prioritizing of their job retention over their responsibility to their constituents that is preventing the right decision to be made. We do not claim to know what the right decision is, but we do expect them to know. All we can do is offer a decision tree to readers of what we think will happen and why it will occur in this fashion.
What Happens Next
There are two scenarios we are looking at though a political prism. Our conclusions are digital. First of all and of major importance , we believe it is in the GOPs interest to have the economy be in its worst shape possible going into the election. It is their method to be the party of no to Obama’s ideas. And it is their method to be the party of “tax cuts” to actual suggestions. This is essentially what came out of the Super Committee. The GOP wanted tax cuts, the Dems did not. Thus deadlock continues.
Therefore nothing will happen until post election. And post election, the dollar will get decimated. Post election will create an environment wherein risk assets rise again. There will be Good Inflation (Stocks, Stocks, and more Stocks) and bad inflation (oil, gold and grains). Wall Street wins as fees from the never ending asset ping pong makes investors migrate their holdings from one class to another. Remember those Golden Crumbs that fall off the bonds when they are sold, from Bonfire of the Vanities?
The FMX Economic-Politic Answer Key for 2012
From the above you can see, it is not in the GOP’s best interest to agree to anything that doesn’t include their most cherished ideal: a reduction in Taxes. It enhances their chance of victory in 2012. It is not in the Dem’s interest to agree to Tax Cuts on principle and as a de-motivator for its voting base.
Nothing will get done. We will continue to kick the can up an increasingly taller hill, is a Sisyphean effort to fix the problem. Meanwhile the Europeans are playing shell games with their own debt. And it is this which jeopardizes our decision tree analysis and the conclusion to buy ‘risk on” assets as we come closer to election time.
Europe as Spoil Sport
Right now, European situation can be described as Germany (Printing, NEIN!), versus the rest of Europe (Printing OUI!). Currently the deflationary/sovereign issues plaguing the Euro have given Bernanke an opportunity to open a window to print more Dollars as the Fed lends to Euro banks. So while Euroland fights it out, Ben takes the opportunity to get ahead in the currency race to the bottom.
It would seem based on the fight, that the answer is print or not print. We think Germany is playing brinksmanship and will print. But we are concerned with a scenario talked about but not given enough attention; the removal of countries from the Euro. Every country that leaves the Euro is deflationary. The bigger the economy expelled, the stronger the Euro gets. This happens while simultaneously the country expelled experiences inflation or even hyperinflation on the Scale that Argentina experienced 12 years ago. So because of a redrawing of nationalistic boundaries, Germany cannot sell anything to its weaker sisters, due to a combination of its own currencies strength, and the expelled country’s lack of purchasing power due to rampant currency debasement.
This nightmare messes up our pretty little decision tree, but it is possible. The U.S. would be dragged into a global deflationary spiral, where more and more money is printed, but less and less is spent.
You would see ever tighter economic ties between Russia and Germany, and the U.K with the U.S. as the Asia becomes a wild card of domestic issues.
We’re buying physical assets on dips and selling stocks on rallies, essentially the Rogers position at levels far worse than his, but we believe having a long way to go. Gold is among those assets.