THERE WAS CERTAINLY NO SURPRISE FROM THE FED TODAY EXCEPT THAT THE FOMC STRESSED THAT THERE ARE SIGNIFICANT DOWNSIDE RISKS TO THE ECONOMY. It appears that this phrase caused the markets to sell everything after the release of the most important outlook for U.S. economic policy. The market’s response must have left Mr. Bernanke wondering just what the FED could actually do to lift the “animal spirits” of the investor and business community.
As was mentioned in yesterday’s NOTES, it seems as if the markets are undergoing a change of thought and beginning to anticipate the onset of a renewed global economic slowdown. The U.S. DOLLAR is gaining some upside momentum as global investors look to safety instead of risk. The U.S. is locked in a ZERO INTEREST RATE POLICY (ZIRP) and is widely viewed to be in the throes of a political battle causing dysfunction as it heads into the 2012 presidential election.
Four economic lightweights from the Republican leadership wrote a letter to the Bernanke Fed advising them against further efforts of easing and this just prior to the FED decision. Last week it was the MASTER OF THE HOUSING CRISIS, Barney Frank, who offered advice as to whom should be able to vote on FOMC decisions. The Bernanke FED is now a campaign issue for the 2012 election but the FED will get a reprieve as it will be WALL STREET that will be the target of the public’s antipathy as the election heats up.
The large WALL STREET banks will rue the day that Glass-Steagall was ever repealed. (It will be of little matter for those corporate chieftains who took the money and ran.) If the prices at today’s close (across the gamut of asset classes) was an indication of global sentiment, the world’s investors are suddenly growing very tired of the ill-conceived policies of European and U.S. decision makers. HOW MANY ROADS CAN A CAN BE KICKED DOWN?
The ECB and the Eurocrats have failed to present a cogent plan for dealing with the PIIGS. They have merely jumped from crisis to crisis in search of a BRIC HOUSE only to find that everything is merely made of straw. Trichet has practiced a banking plan that would have made DON QUIXOTE proud as he has tilted at the windmill of inflation. He has overseen two rate increases in the last six months as the European debt crisis has become more entrenched. The Germans have demanded more austerity from the beleaguered PIIGS even as their economies have head into negative growth. Berlusconi and Sarkozy believe that the biggest public works projects in Italy and France should be building even larger BALCONIES for them to stand on as they orate.
The Chinese send up false positives about providing funds to help buy European Sovereign debt but fail to deliver the money, thus disappointing the markets and creating very short-lived relief rallies. The Brazilians repeatedly warn of CURRENCY WARS as the ZIRP of the U.S. has caused money to flow to the high growth/high interest rate emerging market economies. It is not just the Brazilians who are complaining about the ill-effects of overvalued currencies. Today, Alan Bollard, governor of the RBNZ, was voicing his concern that the KIWI was overvalued.
Also, it was the SWISS who have raised the effectiveness of CURRENCY INTERVENTION TO A WHOLE NEW LEVEL. Throw in the political chaos in the MIDDLE EAST and war in many parts of the globe and the market reflects that investment capital is exhausted. Even in a ZERO INTEREST RATE ENVIRONMENT, money is becoming tired and wants to be like DOROTHY in the WIZARD OF OZ. IT JUST WANTS TO CLICK ITS HEELS AND GO HOME.
Tags: 2012 Presidential Election, Alan Bollard, Barney Frank, Berlusconi, Bernanke, Brazil, BRIC, currency wars, ECB, Fed, FOMC, Germans, Glass-Steagall, PIIGS, RBNZ, Sarkozy, swiss, U.S. Dollar, Wall Street, zero interest rate policy, ZIRP
September 21, 2011 at 6:35 pm |
Now that was really good!
September 22, 2011 at 11:52 am |
From an American in London, Global Warnings: http://www.nytimes.com/2011/09/18/business/economy/adam-posen-presses-central-banks-to-act-more-aggressively.html?pagewanted=1&_r=1
September 22, 2011 at 2:09 pm |
Some TV pundits have ask the question of whether or not monetary policy should be explicitly linked to the unemployment rate. I guess this idea, in theory, is a alternative form of an additional monetary policy ease. But it did prompt me to ask why not do fiscal policy explicitly linked to the unemployment rate? It would work either way…give the republicans literally everything they want (cut the budget dramatically with an emphasis on entitlement programs, lower or flatten taxes dramatically, etc)…AND if after 12-18 months there is no improvement in the unemployment rate the policy is DONE as laid out in the bill itself. This could easily work in reverse too. They could literally pass the Obama jobs plan or whatever it was officially tagged as…and IF after 12-18 months or say next election cycle the unemployment rate was unchanged the policy is DONE…the added benefit is that the Republicans should find themselves in the White House (provided they don’t nominate some crazy nut).
I personally think this would work a bit better if applied to the Republican proposals from the stand point that in the midsts of a legimate depression, Government stimulus could only be more effective compared to the same stimulus applied in a non-depressionary environment (assuming it is effective at all). But this way we could really see just how many companies make 30-100K decisions (hiring new people) in order to get 5-10K in tax incentives.
What do you think, totally crazy?
September 23, 2011 at 1:58 am |
Yra,
Very soon we will have 2 per cent yields (3.5 per cent on 30 years) AND over 4 per cent CPI. As someone so much more experienced, Yra, could you tell where the P/E multiples ought to be?
September 23, 2011 at 7:40 am |
USIKPA—that question is not my strength in the depth of the numbers.In the global mcaro picture the question you are posing is what should the equities do in a negative interest rate environment–the 90% answer is that risk assets ought to perform better then debt but that is what is bothering bernanke and company.Again–I have been wrong in not buying debt as tens have dropped from 3.5% to 1.8% and I sat watching–but i felt about the dot coms in the same way and watched from the sidelines but if it doesn’t make sense I would rather wait—I will trade the debt futures but I will not buy a cash treasury with my investment capital for the reason you bring to the surface
September 23, 2011 at 7:46 am |
Danny–cutting government spending at this time is a major risk as the liquidation that would take place in the private sector with a new downturn may tip the entire global system into a deflationary spiral.The republicans who desire a flat tax is something a agree with—but it is not going to get done in an immediate period and therefore is something that should be being worked on but should not handcuff the debates on fiscal stimulus.Time is not on Obama’s side–
September 23, 2011 at 8:48 am |
Yra…how does the “Twist” effect your reading of 10/2’s chart you like to follow
September 23, 2011 at 9:39 am |
Bruce –the treasury curve has been so badly distorted by the FED that I am trying to regain a read on it and its meaning–as the recent dynamic flattening towards 150 basis points has been right in line with the DOLLAR and the fall in the equities and all the other fears of a global downturn–but I still think the FED has truly distorted the curve and they will probably come to regret it—-Banks can no longer surf the curve for free gains
September 23, 2011 at 9:52 am |
Yra, thanks for the honest answer. Some pundits say once we ‘are over 4 per cent CPI, equity multiples start shrinking. But, that’s not scary.
What is scary is that the FED is basically going to scoop up treasury paper at negative real yields (!). What if someone BIG suddenly decides this is THE LAST CHANCE to turn back in that paper to the US Government at THESE ‘generational high’ valuations?
Dollar debasement will bring much more problems than ‘the end of the world’ in Europe. And we are THAT close to it!
September 23, 2011 at 11:22 am |
well said and we know whom that -large player may well be–but the modelers want know it until it is all over—-debasement,debasement, debasement