“Iacta alea est.” – Suetonius to Julius Caesar, upon crossing the Rubicon, January 10, 49 BC
Yielding to Political Will
Recent events have underscored a troubling truth: humanity frequently succumbs to political pressures, often setting aside reason in the process. A few months back, Senator Chuck Schumer urged Federal Reserve Chairman Ben Bernanke to “get to work.” In response, yesterday’s FOMC statement revealed Bernanke’s compliance…
“….The Committee agreed today to enhance policy support by acquiring additional agency mortgage-backed securities at a rate of $40 billion per month.”
And here’s the crucial point…
“Should the labor market outlook not show substantial improvement, the Committee will maintain these purchases of agency mortgage-backed securities, consider further asset acquisitions, and apply other appropriate policy tools until such improvements occur within a stable price framework.”
Following the FOMC announcement, stock prices surged. The DOW rose by over 200 points, closing at 13,539. Gold also experienced a spike, increasing by $50 per ounce. Continue reading
The Labor Department released the August jobs report last Friday. Economists polled by Bloomberg had predicted a gain of 130,000 jobs. However, the actual figure for new jobs created was only 96,000.
This discrepancy carries significant implications. Firstly, it indicates that economists’ estimates were off by a striking 35 percent. It must be nice to work in a field where such inaccuracies are deemed acceptable; most professions would see a severe impact on performance reviews for similar errors.
Moreover, the disappointing jobs report implies that Wall Street’s anticipation for further quantitative easing is reaching a boiling point. It seems that, in this perplexing economic environment, bad news for the economy is viewed as good news for stock prices. This data could very well provide the impetus Fed Chairman Ben Bernanke needs to launch an open-ended Treasury purchasing program.
At Economic Prism, we hold the view that Bernanke’s options are currently limited. While he may be erratic, he isn’t entirely oblivious. Continue reading
Yesterday, European Central Bank President Mario Draghi announced a potentially unlimited bond-buying program aimed at preserving the euro’s stability. Following this announcement, the S&P 500 surged by 28 points, closing at its peak since Lehman Brothers’ collapse. You can interpret this as you like, but from our viewpoint, it seems to signal another impending disaster.
A broken clock is correct twice a day. The reality is that at any moment, the stock market could crash. That remains our prediction, and we’re steadfast in this belief.
On July 20th, we published an article titled Get Ready for a Massive Stock Market Selloff. In essence, the article warned that the absence of monetary easing, coupled with a weakening economy and a Congressional deadlock as we approach the fiscal cliff, would lead to a significant market downturn.
To be frank, we expected the stock market to start declining by now, or at least to halt its upward trajectory. Yet since July 20th, the market has continued to rise, increasing by more than 5 percent as measured by the S&P 500. Continue reading
“The lord giveth increase, but man devised credit.” — Garet Garrett
Solving the Debt Problem with Credit
An extraordinary phenomenon occurred in the wake of the war that was supposed to end all wars. European economies lay in tatters, and their governments were suffocating under debt owed to the U.S. Treasury. Compounding matters, Germany was burdened by heavy reparation payments to France as dictated by the Treaty of Versailles.
One potential resolution for Europe was to default and repudiate the debt. While this would have caused considerable upheaval, it could have allowed Europe a chance to shed the financial weight of the war and gradually rebuild a stable economy. Instead, Europe chose to confront its colossal debt load with an influx of credit.
The U.S. government, despite being owed a significant sum, resisted funding European reconstruction efforts. However, private American investors and speculators were eager to deploy their surplus capital. Indeed, Wall Street became enamored with the notion that America’s credit could provide a solution to Europe’s debt crisis. Continue reading
