The week ahead will be waiting for the words of wisdom from Ben Bernanke and his take on where the U.S. is at and where the economy is possibly going. THERE WILL BE NO QE3. IT IS NOT BECAUSE OF RICK PERRY BUT BECAUSE QE2 IS A FAILURE BY ANY METRIC. THE YIELD CURVE IS FLATTER; UNEMPLOYMENT HASN’T IMPROVED; AND THE BELOVED PORTFOLIO BALANCE CHANNEL IS A NON-EVENT– AS MEASURED BY THE S&P/BOND RATIO–FOR THAT BELOVED INDICATOR IS BACK TO WHERE IT WAS AT LAST YEAR’S BERNANKE BLOCKBUSTER SPEECH. What did we get for the $600 BILLION in asset purchases. I know things would’ve been much worse. The FED has locked itself in to a two-year zero rate policy so it makes Bernanke’s task very difficult as the FED has expended a great deal of good will and has very little to show for its effort.
Granted, last week’s problems largely emanated out of Europe as the most “important” European meeting since Yalta resulted in a big YAWN. Sarkozy and Merkel seem to have very little understanding what the real problems in the European financial system are so each failed summit brings a more negative reaction from the markets. Chancellor Merkel was saying during the weekend that Europe didn’t need a DEBT UNION but a STABILITY UNION. I know what a DEBT UNION requires but I am lost in trying to define the concepts of a STABILITY UNION.
Does a STABILITY UNION mean that the EFSF will be granted more funding to support the beleaguered SOVEREIGN DEBT markets of the peripheries? Does a STABILITY UNION mean that some EUROPEAN entity will secure the financial system even without a centralized fiscal authority? Merkel is talking but her rhetoric raises more questions than answers.
THE EUROPEANS ARE INVOLVED IN A CREDIT CRISIS and yet there seems to be little understanding of how to resolve it. The European BANK STOCKS got hammered last week as investors are fleeing for fear of a credit crisis spinning out of control and there doesn’t appear to be a lender of last resort to backstop the system. Yet Merkel insists on STABILITY without defining what that means and what policies are needed for a successful outcome. If Europe believes that the Americans are going to come to provide financial support, they will be greatly disappointed as Bernanke has a difficult time explaining U.S. monetary policy to the politicians looking to make the FED a 2012 election issue. The world waits to see if the Europeans are listening to the cries of a banking system in search of aid. Maybe Trichet will find this as another opportunity to raise rates!
A quick hitter: The August 19 online issue of the New York Sun had an editorial titled, “Waiting For De Gaulle.” It is worth a read as it looks back at the French President’s concerns about the U.S.’s ability to debase the DOLLAR. It cites a speech that De Gaulle gave in 1965 and the U.S. reaction to the French concerns about the GUNS and BUTTER of LBJ. Remember that the Kennedy and Johnson years were policies that were crafted by the BEST and BRIGHTEST.
It is difficult to appeal to the words of De Gaulle, but when he is right he is right. As the editorial says, we must remember that Bernanke by his own admission is mystified by GOLD. It is always interesting to see how little respect global policy makers have for markets yet the whole concept of THE PORTFOLIO BALANCE CHANNEL, which is to support equity markets. However, relying on the concept of the wealth effect or “animal spirits” mystifies most of the world but certainly not the GOLD market! BERNANKE GOLD PRICES ARE MYSTIFIED BY FED POLICY.