Is there any level-headed individual outside the talking heads in the media who didn’t think a “compromise” would be made in the 2011 budget. The details don’t even matter for the outcome was never in doubt and the impact for the markets is less than marginal.
The 2012 budget will be much more important but let’s not forget that it is an election year which is typically not a time when American politics experiences any great show of leadership. Mr. Obama will not want to take great risks nor will the incumbents in CONGRESS. The Republicans had better control the clowns who always push their social issues to the fore cloaked in fiscal responsibility. Democratic leadership will have to get serious over entitlements going forward for the coming increase in interest rates who ensure that many promises previously made will not be able to be funded.
The next big dialogue will involve concern about the PRIMARY BUDGET. That will be what the DEFICIT OR SURPLUS LOOKS LIKE BEFORE INTEREST COSTS, FOR THIS IS TRULY GOING TO BE THE DANGER GOING FORWARD. THE FED WILL NOT BE ABLE TO SUSTAIN ARTIFICIALLY LOW RATES FOREVER AND THAT IS THE GREAT DANGER GOING FORWARD. IF THE FED LOSES ITS CREDIBILITY, THE RATES AT WHICH THE U.S. TO BORROW ARE GOING TO INCREASE DRAMATICALLY. THE PRESENT BUDGET BATTLE IS A SIDESHOW COMPARED TO THE PRESSURE THAT THE FEDERAL RESERVE IS GOING TO BE UNDER AS GLOBAL INVESTORS CHALLENGE ITS STRATEGY FOR MAINTAINING THE WORTH OF THE DOLLAR.
IT SEEMS THAT EVEN U.S.-BASED INVESTORS ARE BEGINNING TO CHALLENGE THE BERNANKE-LED FED. THIS WEEKEND, ZERO HEDGE REPORTED THAT PIMCO WAS BEGINNING TO SHORT TREASURIES. As always, the best laid plans as drawn up with theoretical models, OFTEN GO AWRY.
This weekend Fed Vice Chairperson Janet Yellen spoke and she stayed consistent to her previous views: “Economic conditions do not yet call for the FED to exit from its unconventional policies.” Yellen acknowledged that the FED may have to ease up on the gas pedal of stimulation and feels that the FED has the needed tools for doing so. Like many others at the FED, Yellen reiterated the importance of a” precise communications strategy will be key to guiding market expectations.”
The FED has placed a great deal of importance on the communications channel of its policies and thus we have Bernanke undertaking four press conferences a year after the release of FOMC statements. The question that I would ask the FED GOVERNORS is this: THE MARKETS ARE COMMUNICATING THAT THERE IS A DECLINING FAITH IN YOUR POLICIES. WHY IS IT THAT THE FED PAYS NO HEED TO THE WARNINGS THAT THE MARKETS ARE SENDING?
ALL COMMUNICATION IS DEPENDENT ON A SENDER AND A RECEIVER. THE MARKET IS SENDING BUT THE POLICY MAKERS ARE NOT RECEIVING. HOW WILL THE FED ACT WHEN ITS COMMUNICATION IS TREATED SIMILARLY? HOW HIGH WILL RATES HAVE TO GO FOR THE FED’S COMMUNICATIONS TO BE RECEIVED? That will be the most important question going forward.
A weekend quick hitter: The NYSE has rejected the offer that was issued by the Nasdaq/ICE and is content to move forward with the DEUTSCHE BOERSE. This is going to get interesting for the Nasdaq bid price is higher so it will depend on how NYSE shareholders feel about the higher offer versus a potential more dynamic future with a European partner.
I wonder if CFIUS will move to block the Deutsche Boerse bid based on national security concerns. If I ran the DEUTSCHE BOERSE I would move to BID for the ICE and really shake things up, especially because the ICE already has a prominent European presence. If the DB bought the ICE it would render the financially strained Nasdaq to a position of being the hunted rather than the hunter. Just thinking outside the proverbial box.