Show Me The Money!

July, 19, 2012

According to Chairman Bernanke’s testimony in Congress the other day, he said he is concerned by two major events: The Fiscal Cliff on January 1, 2013 (expiration of the Bush tax cuts and the imposition of new taxes in the health insurance program) and the deteriorating situation in Europe. Oh yea, the economy is “growing” too slowly and employment levels are unacceptable. Also, that the Federal Reserve stands ready to add additional “accommodation” if necessary.

 

Here is the translation: without more money from the government, the economy is headed back into recession. Why?

 

1. We have not solved the problems associated with the b bursting of the financial bubble (bank, housing, consumer debt, etc.)
2. The “solution” (increasing the money supply) we have taken has made matters worse.

• Stimulus wasted
• QE1, QE2, Twist, Zero interest rate policy, etc. causing mal-investment
• Chronic, excessive spending at over $1 trillion per year
• Regulations that don’t make sense and are undefined
• We haven’t even discussed current mal-investments (other bubbles) like education, free healthcare, bloated government and financial system.)

3. Will more money solve our problem? No, but we have been able, through massive insertions of money, to “reduce the pain” of recession by postponing reality; but this only means that it will take longer and the problems will get more severe when we are forced to deal with reality. For example:

 

• We have added, in sovereign debt alone, $9 trillion (nine thousand billion dollars) and we can not even cut one billion from our spending.)
• Our debt is now (before next year’s budget and a new higher debt limit) at 102% of our GDP. That of course is before corporate debt, consumer debt, state and municipal debt, etc.)
• Even more troubling is that our sovereign debt is now at 10% of our revenues (taxes) and 10% is the line that determines risk and no risk. And that’s at our current low interest rates. Therefore, going forward, by definition, U.S. Treasuries will no longer be “risk free;” and you can see what’s happening in Europe. 

Will we solve our economic problems?

 

Yes. But the method and timing are uncertain. In the meantime, we are left with letting the economy slide back into recession (enabling the problems solve themselves) and accepting the pain that goes with it OR adding more paper money and trying to kick the can a little farter down the road. My guess is that the politicians will, when they begin to feel the pain of reelection, show us the money.

 

It is theoretically possible to get a politician to define and articulate a strategy to get our economy back to reality in X number of years. But, if that politician doesn’t show up soon, we will eventually be left with two options: default or very high inflation.

 

Our economy and markets are now unfortunately left to the whims of politicians which mean we have to think differently and adjust our strategies to match reality.

 

Three Big Events Coming In The Next Two Weeks

June 14, 2012

Everyone knows we have lots of headwinds facing the U.S. and the global economies over the course of this year. But, I wanted to comment on three events that could move the markets in the next two weeks.


First is the Greek election on Sunday, the 17th.

The conventional story is that if the far left party, headed by SYRIZA, wins, he will negate the "Memorandum of Understanding" that the Greeks made with the EU in order to get their latest bailout money. If that happens, many feel that Greece would have to voluntarily leave the Euro and go back to their old currency which would be very painful in the short term or the EU would have a reason expel Greece from the Euro. The election is too close to call.

From everything I can find it looks like SYRIZA may modify his view to one of re-negotiation rather than simply tearing up the Memorandum. One reason is that a survey says 80% if Greeks want to stay with the Euro; they just don't want the severe austerity that goes with the agreement. Also, Spain just received a promise of a bailout package without the severe austerity demands placed on Greece. Also, a large number of SYRIZA's supporters are government workers and want to keep getting paid.
Therefore, on Monday morning, the S&P500 could open up much higher or much, much lower. And this is not to mention Egypt with the military decree that the last election was illegal.
Second is the decision of the Federal Reserve on Wednesday, the 20th

The country is disproportionally divided on whether the government should inject more money into the system. Keynesians are demanding additional government spending and money printing. Keynesian-Lite's are demanding tax cuts and defense spending paid for with borrowed money. Net, more spending and more printing of money.

The markets appear to be waiting for the Fed announcement which they believe will be for more printing or QE3. Or at the least, more "Operation Twist" for a few months with QE3 coming soon. If the Fed says they are standing pat, it could disappoint. If the Fed's goal is to keep markets stable or prices stable, they need inflation (QE3 which is money going into banks so they can drive up asset prices) to offset the deflation going on in depressed industries.

Therefore, we could have a much higher market or a much lower market on Wednesday.

Third is the Supreme Court Decision on ObamaCare

The Supreme Court usually announces decisions on Monday's in June before they recess for the summer. This means next Monday or the following Monday. The two big issues I think are the mandate that everyone is required to buy health insurance or pay a fine/tax; and if the court will through out the entire 2,000 some page law altogether.

The result will move the market either way.

I Am Schocked!

June 6, 2012 European politicians have announced that they have found a way to keep the banquet going for a while longer. Isn't that what politicians are supposed to do: keep kicking the can down the road past the next election?) They are in the process of putting together a program to refinance Spain's banks through European guaranteed loans. Not recapitalize the banks but get them refinanced. According to the press reports, Germany will agree to this (it can't be done without German guarantees); and Spain will agree because they will not impose an austerity program on them like they forced on Greece. When is this supposed to happen? After the banks are audited, they expect a package ready by the beginning of July. Will this actually happen? Who knows but there is great pressure on Germany, even Tim Geithner is telling Europe to do something (and it not to pay taxes.) Also, for a small kick down the road and more time, the short-term costs to Germany may be less than the long-term costs. Maybe they can even get help form the U.S. Many Keynesian economists are telling Bernanke to help. Even Steve Liesman of CNBS called for the US to help bail out Europe. The rhetoric is beginning to change here also from "we're done" to more stimulus and money printing. Isn't that what politicians are suppose to do? Yesterday in the Wall Street Journal, Jon Hilsenrath wrote an article about how the Fed may now be ready to be more accommodative (Federal Reserve information is often leaked through Jon). He indicated it could be a short-term extension of the "Twist" program while they wait for more negative economic news or maybe direct purchase of bonds. Timing could be June20 meeting or maybe August depending on how they see the economy performing. Are you shocked?