Question of the Day|
Will action from the Federal Reserve make a difference to the economy and why?
Click here to post your answer and let Charles know what you think. He will air some on the Payne Nation radio show.
Sure it was elephants (the type is in dispute) that added that shock and awe effect, but it was the cavalry that befuddled the Romans. Considered by many to be the finest light cavalry in history, the Numidian (Land of the Nomads) Cavalry tipped the scales of battle so much that Celtic tribesmen, great riders as well, joined the effort to defeat Rome. So, word came that Carthage was under attack and Hannibal comes to the rescue despite 16 years in Italy. The day before his fateful battle with Scipio, the Numidian cavalry switched sides and joined the Romans.
To the Rescue
I'm reminded of this story as the world awaits the charge of the cavalry lead by Angela Merkel and German taxpayers. Investors want elephant-sized solutions, but what happens if it's all about swift horses instead? Right now Merkel is trying to avoid the mistakes of Hannibal. She has a chance to put old, reckless, and profligate notions to rest for good and help rebuild a responsible Europe where work is rewarded and leisure isn't. While Spain is hogging headlines this week, any accommodation and agreement with respect to focusing on a stronger Europe has Italy in mind. The focus began with a slew of nations, several took early bailouts and then Greece became the key crisis, due in part to contagion risk.
That risk saw a worst case scenario of this all bubbling up at Italy's doorstep. Just as Hannibal was knocking on the door, so, too, was economic disaster and potential solution(s). One of the biggest problems is that those pitching solutions are speaking from their own ideologically belief and not economics or commonsense.
Mountain of Debt
I seethe when politicians, television personalities (especially news anchors) and economists try to blame the current state of Europe on austerity that has varied from a few months to a few weeks depending on the nation. The fact is that these nations have redistributed wealth to union government jobs in order to remain in control of power. In Italy, the economy has been stalled for more than a decade (in fact more than two decades) so blaming slow or no growth on austerity is a lie.
Check out the past decade in Italy and see how debt as a percentage of GDP grew while economic growth moved into reverse.
To underscore just how much room there is to reduce public sector workers in Italy, the austerity plan calls for a three year wage freeze for public sector workers, with those earning more than €90,000 taking a five percent haircut and those earning more than €150,000 taking a ten percent haircut. But, most telling is that for every five public sector workers that leave the workforce only one will be hired. Talk about bloated.
Italy & Obama's Economic Game Plan
Just as Spain has provided a cautionary tale for why President Obama's economic plan of mass government hiring, infrastructure jobs, high speed rail and clean energy can come back to hurt us, Italy underscores how bloated government bogs down growth and erodes the work ethic.
"It's an army of generals"- front page Italian newspaper editorial 2008
In addition to sloth and entitlement, nations with massive public sector employment coincidently are the same that are dying or clinically dead already. Italy is a prime example of this and it's not something that sprang up out of the blue. For years some have warned of the lunacy of the notion that 30% of all workers can work for government. Moreover, these same workers make so much more money than their private-sector counterparts. Think of it as the situation in America on steroids.
Next time I hear someone blame income inequality as a reason for problems in Europe and America, I will ask if that means they think public-sector pay should be cut dramatically to rectify that problem. The wage gap in Italy between public and private is astronomical. There was a 20% difference in 1980 with public enjoying the edge. From there the spread increased to 30% in 1990, dipped to 22% in 1995, but soared back to 36% by 2008. Talk about unfair. The people paying the wages are making chump change and yet this is part of the blue print for those pushing the idea of fairness in America.
A front page editorial in a leading Italian newspaper railed at the fact that in the previous year 90% of public sector workers got a promotion and raise, leading to the headline:" It's an army of generals."
People in those nations that went down this path stopped fighting and just tried to find a relative or friend that could get them on the gravy train. But now the rest of the world is being asked to pay for this unsustainable arrangement.
The Pitch in Los Cabos
President Obama, when asked about how to fix Europe (and by extension America), pitched the same economic game plan we have heard and will hear until November.
"Green economic growth that also combats climate change" struck a nerve since the focus is now on Italy, which happens to be the world's second largest solar market and last year lead the entire planet in solar growth. If this is the cure-all, what the heck is happening in Italy, which along with Spain has poured billions of taxpayer money into the dream?
"Promote growth" was uttered at least three times with respect to fixing Europe, and by now, we know it's a euphemism for taxing the rich, almost rich, and corporations; and hijacking profits generated abroad.
The economic plan Obama wants to use has been in place for decades in Europe and it is disastrous. Yesterday, there were rumors Merkel would blink and Bernanke would wink and all would be well. Any fix must be disruptive and also carry components that engender work ethic and accountability. The fix must be long term, not Band-Aids.
I'm looking for nations that need bailouts to do the right thing, embrace free markets, unleash their private sectors, and pay their bills. That should be the only way the cavalry comes to the rescue.
The Fed in Focus
By Carlos Guillen
After a rather encouraging trading session yesterday, today the suspense continues to build as everyone will be focused on what the Federal Open Market Committee (FOMC) will convey about quantitative easing. As of now, the Street's expectations are quite high that some form of liquidity will be put in place to spur economic growth in the short run; but given yesterday's gains, it seems that we are more vulnerable to the downside if the FOMC fails to give the Street what it already has built into the price of stocks.
By the end of yesterday's trading session, the Dow Jones Industrial Average managed to hold on to most of the gains achieved during the first half of the trading day; however, there was some turbulence in the index after a German official negated positive rumors of more aid becoming available for weaker euro zone nations. According to British media reports, German Chancellor Angela Merkel was poised to use Europe's dual bailout funds, the European Financial Stability Facility and the European Stability Mechanism, amounting to €750 billion, to buy debt from some weakened euro zone nations like Italy and Spain and prevent the euro from collapsing. This action was long opposed by Angela Merkel as she feared that Germany would be stuck with the bill of the weaker nations. And, as it turned out, German government officials came out later in the day and said there were no discussions at the G-20 meeting about any plans to use EU rescue funds to buy bonds of debt stricken members of the euro zone.
The news quickly brought stocks lower and left indices oscillating into the close of trading, but the Dow still finished up 95.5 points, or 0.75% from the prior closing price, with the strongest sector being Materials and Financials, up 2.0 and 1.7 percent, respectively.
Today, the FOMC will continue its two-day meeting, and all expectations are that the U.S. central bank will extend its "Operation Twist" program in an effort to drive down long-term borrowing costs and to increase liquidity in the economy. As it stands, the U.S. economy has been experiencing rather increasing headwinds, which have been resulting in lower and lower gross domestic product growth and even lower growth expectations. As such, it is understandable to assume that the Fed will move to anticipate a slowdown and provide some form of liquidity to promote economic growth. However, with the Fed funds rate already close to zero, the Fed has less ammunition to fight with, and let's not forget that while inflation is under control, it is still rather tight.
Nonetheless, the Fed still has bullets left, and the Street currently expects the FOMC to leave the Fed funds rate untouched but to announce the extension of "Operation Twist," a $400 billion bond-buying program set to expire at the end of this month, which involves swapping U.S. government bonds that had a short maturity for those with a longer maturity. The idea behind Operation Twist was to drive down the interest rate on long-term bonds, which serve as a reference in the pricing of auto loans, mortgages, and other longer-term loans to consumers and business. The question now is just how much more "Twisting" does the Fed have? And will the Fed's last weapon be to do one more quantitative easing (QE3), which is printing more dollars? Sit tight ladies and gentleman, and we'll see what the FOMC has to say later today.
Charles' Musing for Today
Will Wall Street Dance
It's all about the Fed and Wall Street whining or dancing. Thus far Operation Twist has had negligible impact on the economy, from jobs to housing, people didn't put on their dancing shoes. Today at the very least the Twist will continue, but it's unlikely to make Ben Bernanke the Chubby Checker of economics. Checker's remake of the Twist, first performed at the Rainbow Club in Wildwood, New Jersey in 1960 became a hit that still resonates five decades later. The song is credited for getting people to get on the dance floor.
Bernanke's Twist didn't create that spark to move the nation into a virtuous cycle. Admittedly, people are more concerned with the war on success and profits than ultra-low rates but the Fed has a mission and thus far cannot claim it's been accomplished. On that note, we are set up for disappointment today. Possible scenarios:
> No Action-market plunges
> More Twist with hints of further action-rally could continue
> More Twist with hints of no further action-market stumbles
> Increases asset purchases and extends timeline for low rates-market surges
The Bank of England minutes reveal a 5-4 vote against more action, but since Mervyn King was among those voting for more action, conventional wisdom holds for action next month.
What I don't understand is if these central banks are ultimately going to take action why do they wait for disaster? Surely these guys have economic models that can predict things faster than my mother who seems to know turns before the Fed does. It's really odd and speaks to how political these guys have become. They already get to message inflation data to provide cover for actions that is often too little too late.
Moreover, when it is time to unwind action, the Fed is even more deliberate. For all its power, the Fed wields it like a child with a plastic sword.