Last Friday, the immediate negative reaction to Bernanke’s lack of QE3 gave way to a ray of hope that the Fed will rescue the economy and, more importantly, the stock market. Thus, the ensuing dollar erosion for the day gave way to healthy gains for equities, and aided the view that Bernanke and company may deliver some form of monetary goodie to further fuel a rally before September is out.
Unlike some appear to think, the Fed is not devising strategies to address the U.S. economy alone, but its plans are inclusive of the much bigger European side show. Postponing any announcement until September 21 looked like the smart thing to do, especially when so much will transpire in Europe during the next few weeks, and keeping in mind that the capital flow issue is alive and well.
Some believe that the Fed is waiting for additional data, but I’m not certain as to what exactly will be revealed in one month’s time, when GDP, the largest economic measure, is dismal, and the micro indicators are virtually stating the same going forward.
Certainly the Fed can continue the call for more fallacious Keynesian stimulus with a pinch of fiscal and political responsibility, keeping the boat afloat a bit longer, while avoiding the reality that the endurance of difficult times and the adoption of tough, yet sound measures is the only answer to the eventual rebuilding of society as we knew it.
In Jean-Claude Trichet’s speech at Jackson Hole, as reported by Bloomberg, the point was made that ultimately the U.S. and Europe are not that different.
It is “often assumed that the U.S. economy would be significantly more homogeneous than the economy of the euro area,” Trichet said at a forum of central bankers and economists in Jackson Hole, Wyoming. “Looking more closely at the regional dispersion across U.S. regions and euro area economies does not confirm this.”
Yes, we are very different from state to state and similarities between U.S. states and eurozone members do exist. But in America we only have one flag and one allegiance, and that’s what’s missing in Europe. In addition, Europe must accept the fact a swap in defense spending must take place, and the continent must become less dependent on the U.S. taxpayer. That’s a little item that tends to be overlooked and hardly a similarity, and where some view that fact as evidence of U.S. imperialism, I see it as a charitable donation. Why not close U.S. bases to diminish U.S. influence? Because they are economically advantageous.
MarketWatch also had a piece on Mr. Trichet.
“All advanced economies are under stress from the crisis - the business model of the U.S., Japan, and the U.K. are under question,” he said.
I don’t question the business model, but rather the government model, and that’s a topic for another day and an issue that is repeatedly avoided. Then Mr. Trichet went on to ease liquidity fears.
“The idea that we could have liquidity problem in Europe is plain wrong,” Trichet said. The level of eligible collateral in the European banking system is much larger than the amount that is in use, he said.
But according to Reuters and during the same meeting, Christine Lagard, the former French Minister of Finance, recently appointed to be the new IMF Director, stated that,
"Banks need urgent recapitalization. ... If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization - seeking private resources first, but using public funds if necessary."
By Sunday European politicians and bureaucrats were upset with Ms. Lagard, and literally called for her to "clarify" her statements, as reported by the Financial Times.
European officials rounded on Christine Lagarde on Sunday, accusing the managing director of the International Monetary Fund of making a “confused” and “misguided” attack on the health of Europe’s banks.
Meanwhile, and as if the upcoming German’s court decision wasn’t enough to worry about, Angela Merkel is facing political pressure regarding Germany’s involvement in the ongoing European bail-out, according to The Telegraph:
German media reported that the latest tally of votes in the Bundestag shows that 23 members from Merkel's own coalition plan to vote against the package, including 12 of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.
Considering all of the above, Ben Bernanke finds himself along with his colleagues in the middle of a balancing act that extends way beyond our borders, and a far more intricate picture emerges that explains the Fed putting off any announcement without explicitly defining any position, and gaining what they perceive as valuable time by giving a few undecipherable crumbs of hope to keep the status quo.
And the short-term certainty going forward is that violent swings in the stock market may become the norm for now, only due to the uncertainty caused by a constant barrage of conflicting and unstable statements in hopes of delivering stability. Unstable? Stability? I know, it’s an oxymoron, but that is what we have to contend with.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.