Waiting for the Cavalry (in Vain?)

Markets have had the excited giddiness of a kid during the week before Christmas. Childlike, they cannot wait for the big day to arrive to open their presents from Santa.

Only the bearded dude isn’t a jolly fat guy in a red suit, he is an academician who is carrying not a bag full of presents, but an unconscionable burden.

This time last year, Ben Bernanke had some concerns: There was the fear of deflation, a decelerating economy, and asset prices acting squelchy. The FOMC decided to target stock prices with another round of quantitative easing — buying bonds — to keep rates as low as possible.

The markets quickly jumped — first in anticipation, than on the fresh flow of liquidity. $650 billion dollars puts an unnatural bid beneath equities, and the short side was a painful place for Hedgies to play.

QE2 ended June 30th this year, and market volatility has risen since. We already have QE 2.5 — rolling Fed repurchases as their short term bond holdings mature — but QE3 remains more doubtful. Not because its “treasonous“,* but because it is failing to reach the “real” economy. The political situation within the FOMC makes it increasingly unlikely anything like a QE3 will be coming out of the Jackson Hole confab. Perhaps Santa Clause Ben Bernanke has something in his bag of tricks, but that looks like a long shot. Thus, we are set up for some disappointment.

The Fed’s focus on equity prices is the least of our concerns. The US is suffering from a long list of serious — but not unsolvable — problems that require intelligent, mature and potentially painful decisions

Can the US resolve these issues?

1) An excess credit problem, left over from the 2000s Housing boom and credit bubble — being solved v e r y  s l o w l y through deleveraging and passage of time;

2) Slowing economy and high unemployment (including increasing High School drop out rates creating a structural employment problem);

3) Crumbling infrastructure: Electric Grid, Bridges, Tunnels, Roads, Naval Ports, Airports;

4) Medical Costs that are double the rest of the industrialized world’s yet produces worse results.

5) Systemic deficits caused by unfunded tax cuts, unfunded entitlements, and a military bigger than the next 20 countries combined, (plus a lack of fiscal discipline);

6) A wholly dysfunctional electoral process, including corporate control of what was once a democratically elected legislative branch;

7) Increasing wealth and income inequality (Historically not a long term positive for social unrest and political legitimacy)

8) An overt hostility to empiricism and science (which helped create most of our wealth) and an embracing of “magical thinking”

9) An intellectually bankrupt political class married to outmoded, disproven, fantasy based economic ideas.

Note that the last of these is directly responsible for much of the prior 8 problems.

We need to distinguish between immediate concerns  — market crashes, unemployment, re-election — with the longer term structural problems facing the US.

The next 10 years can either be the end of the empire or a new healthier phase. The US has managed to reinvent itself every few generations. Its time for another such moment of reflection and redirection…



* Won’t someone please explain the difference between monetary policy and seceding to Gov. Rick Perry?

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