With midterm elections on the immediate horizon, candidates are doing everything they can to get elected. For some, general talk about freezing the budget and keeping taxes where they are now are widely debated. At the same time, QE2 is being considered by the Treasury, presenting a unique circumstance where the United States appears to be considering something the rest of the world is not.
While other countries are cutting spending, engaging fiscal austerity measures, and raising taxes aggressively, site UK, France, Greece, and Spain, the United States is considering QE2. Austerity has not even been mentioned. Instead, debates about only freezing spending and taxes exist. That is politics for you, and this time the immediate effect is a weakening dollar.
Investors are watching the rest of the world take prudent steps, while the United States sits ready to infuse more money into the system without taking prudent measures itself. In actuality, that is not the case. Politicians know they will not be elected if they vow to cut spending and raise taxes. If they vow to hinder the economy, and engage prudent fiscal policies that will hurt the earnings streams of voters, those voters will not elect them. Therefore, as the midterm elections loom, the tone is less about austerity, and more about stimulus.
Interestingly, the Media has been largely debating the Democrat or Republican control of Congress, and measuring that as a key element to the fiscal policies going forward, when it is actually a moot point. No matter who is elected, fiscal austerity measures are coming, and taxes are going up. Given what lies ahead in our economy, there is no way around it. The Investment Rate, which is the most accurate leading longer term Stock Market and economic indicator in history, proves that a Greater Depression is highly probable.
In this weakening environment, the Government of the United States will have no choice but to walk the path of other prudent nations, the UK being a stalwart, and engage fiscal responsibilities to offset spiraling national debt. Once the Street comes to grip with this future correlation, a correlation that will become obvious after the midterm elections, the direction of the dollar is likely to change. The US Dollar has been very weak recently because of the perceived dissimilarities between nations, when in actuality there is a correlation between them, behind the scenes.
The only reason the United States appears less fiscally responsible now, is that elections loom. Once the elections are over, regardless of which party is elected, that will change. The Street, and investors, always act ahead of the curve, so they will pick up on this before it actually happens. That means the direction of the dollar is likely to change before the news is out.
As fiscal austerity measures come into focus in the United States, the dollar will increase, and reverse some of the recent weakness it has experienced. In doing so, commodity prices will fall, as will the price of Gold, Silver, and Oil. Reasonably, this is not likely to last for more than a few months, but a pullback in commodity prices is coming, and coming soon.
QE2 will be a failed attempt if it occurs, because banks do not need money to lend, they need demand to increase. Making money easier to get is less effective than increasing the demand for money. Without demand, there will be reduced velocity of money, and no CORE inflation. The demand side is what is important. Unfortunately, the net demand for new investments in the Economy will decline until 2023, according to the Investment Rate, so we face a very difficult environment. The new dilemma is which measure will be less destructive, not most beneficial.
Sell GLD, UCO, SLV, and buy UUP. Consider the short side of the equity market, and commodity ETFs too.
Disclaimer: This article is for informational purposes only and is not designed for your portfolio. You can lose money trading stocks, and you should consult with your financial advisors before making any investment decisions. These recommendations may or may not have already been disseminated.
Disclosure: no conflicts to report.