Waiting On November 6th
http://albertpeia.com/waitingforgodoe.htm
We’re introducing a new component to Gains
Pains & Capital: politics.
While I’ve stayed out of commenting on
the US Presidential elections and politics in general for the most part, at
this point so much is riding on public policy globally that we cannot analyze
the markets or economy without taking it into account.
This new segment will be located at the
bottom of our daily commentary. If you don’t care to read it, please just skip
it. But we believe this will bring an added dimension to our work that you’ll
find useful.
Now let’s first assess the markets.
We know from various sources that there
is a coordinated effort to keep things calm until after the US election. Based
on this, we can deduce that QE 3 was due to one of two reasons:
1) Propping the markets up
until November… or,
2) Something bad is
coming down the pike and the Fed wanted to act preemptively.
It’s really a toss up (or could be a
combination of both). There is certainly no lack of major issues that all have
negative implications for the markets. Among the more pressing are the threat
of a sharp global downturn (China, the EU, and the US are all in recession),
armed conflict in the Middle East, and the EU’s ongoing banking and sovereign
debt crisis.
In light of this, it’s not surprising
that the Fed has opted to get more money into the system. What is
surprising however is that it’s turned out to be such a dud.
QE 3 was announced on September 13. Since
that time the markets have done a whole lot of nothing. In fact, they are
barely up since the QE 3 announcement.
We did see a similar correction for about
a month following QE 2 in 2010, however after that stocks hit lift off
and didn’t look back:
It’s now been a month since the
announcement of QE 3. So, if it’s going to have a similar impact to QE 2 as far
as stocks are concerned, the markets need to start roaring higher now.
Alternatively, we could indeed have
reached the end game for Fed intervention: a time in which the one positive
aspect of QE (namely stocks rising) is no longer facilitated by more buying.
If that is the case, then the markets are
in big trouble because the negative consequence of QE (higher cost of
living) certainly isn’t being held in check, no matter what the Fed claims
So, the multi-trillion Dollar question
is:
1) Has the Fed overdone it?
Has it finally used up its toolbox to the point that even an open-ended
program has little effect on the markets?
Once the Fed decided to backstop the
system, there was always the threat of this occurring. You cannot have the
capital markets based on moral hazard/ intervention. It not only confounds the
very purpose of the markets (aligning capital with opportunity), but it leads
to greater and greater dependence on the Fed’s intervention. And at some point
eventually the markets no longer respond to the juice.
Can the Fed hold things together until
November? I cannot say. But unless the markets start rallying hard soon, then
the Fed’s in big trouble.
Now for the politics.
The outcome of this Presidential election
will be of tremendous import for both the markets and the economy. During the
first four years of its Presidency, the Obama administration has relied heavily
on Bernanke’s Fed to hold the system together (remember, it was Obama who
re-appointed Ben Bernanke, paving the way for QE lite, QE 2, Operation Twist,
etc).
As a result of this, the recovery has
been anemic to say the least. I can tell you point blank that the latest spat
of improved economic data is not authentic or accurate. I won’t waste time with
the methodology (that would take multiple pages of numbers) but I can say point
blank that employment has not in fact fallen as the headline number indicates.
Aside from this, the cost of living has
increased dramatically while Obama was in office. One can point fingers as for
why this is, but at the end of the day, the reality is that Obama put Bernanke
back in office and has never attempted to keep our Money Printer in Chief in
check.
Thus, our economy has become one of
Central Planning: an economy in which the primary driver of things is Central
Bank intervention.
So if Obama wins again, there will be
absolute hell to pay down the road. The recipe for hyperinflation has always
been the same: Government monetization of a massive deficit. The US has run $1
trillion+ deficits for four years now.
Today, the Fed accounts for over 70% of
all US Debt purchases. The only reason we’ve been able to get away from this is
that the US has not totally lost credibility in the bond markets (yet).
However, to assume that Treasuries will always
have a bid is a very dangerous assumption. If we continue down this same path
of monetizing the US’s deficit via Fed money printing then at some point we
will lose credibility in the markets. At that point the US Dollar will collapse
and hyperinflation will hit.
There is no indication that the Obama
administration has even considered this eventuality. Indeed, I have not heard anyone
on the left refer to Bernanke or the poison of his policies at any point in the
last few months.
On that note, I’m currently preparing a
Special One Time Report devoted to outlining what will happen to both the
markets and the economy depending on who wins this election.In it I will
outline the major developments that will occur in terms of monetary policy, the
US economy, and the stock market depending on who wins on November 6. I’ll also
outline which investments will perform best in a Romney Presidency and which
investments will perform best if Obama wins again.This Report will be given to
all of my Private Wealth Advisory subscribers free of charge. It will go live tomorrow
after the market’s close. If you’d like to reserve a copy, all you need to do
is take out a subscription to Private Wealth Advisory. It’ll then be delivered to your inbox as soon as
it’s ready.To take out a Private Wealth Advisory subscription…Click
Here Now!!Private
Wealth Advisory comes
with a 30 day refund policy.So if you decide it’s not for you at any point
during the first 30 days, just drop us a line and we’ll issue a full refund.Best
Regards,Graham Summers