You would be amazed if you knew just how high expectations are running as to what Fed Reserve bosses might do next Tuesday or Wednesday, after their first ever double-maths period comes to an end. One of the problems with Uncle Ben’s Mice is that, like so many academics and bean-counters, they don’t get people. Bernanke himself, for instance, often gives the impression he can’t see anyone. He sort of stares off into the mid-height middle distance, as if arguing with himself about whether that fly on the cornice is real or not.
But the truth is, astonishingly, that expectations in US markets are very high indeed. There is a cut-off for these expectations, in that it doesn’t include senior Hedge Fund personnel, investment bank board members, or those opinion leaders highlighted in last night’s Slog piece who simply know what’s coming down the road. But the vast majority of investors were buoyed by Federal Reserve Chairman Ben Bernanke’s quiet assertion last time that he still had some surprises in his bag.
My information is that he doesn’t – that is, he wasn’t lying about further tools in the carpet-bag: he just thinks they’re more attractive than they really are. At this stage of the game, only a Big New Simple Idea that’s easy for Joe Investor to grasp is going to cut it. What Ben has in mind is a small and complex very old idea last tried exactly half a century ago. Did the idea work then, I hear you ask? Well guess what – economists are still arguing that point today.
The methodology is called the Twist. It’s a snappy name, but somehow Let’s Twist Again like we did Fifty Years Ago doesn’t have the same immediacy as Chubby Checker’s relaunch of a dance that went on to take America by storm. And the content doesn’t immediately grab you, because the thought behind it is quite dense. Not stupid, just complicated. Here’s Reuters’ attempt to explain it last night:
‘Fed sentiment looks to have coalesced around some form of reshaping the Fed’s $2.8 trillion balance sheet to hold more longer-term securities. Officials hope the move will push down longer-term interest rates, helping encourage home refinancing and business spending. By lowering long-term yields on U.S. debt, the Fed may also push investors to seek higher returns by shifting to stocks or corporate bonds.’
Now of course, all you high IQ Sloggers get the idea instantly. Right now, everyone wants US Bonds. So, lower the yields on the longer-term ones, and you discourage sales.
Banks offering refinance deals to the public stimulate spending and house purchases. Retail and housing markets improve, and confidence begins to seep back into Middle America.
What’s more, investors switch from T-Bills to corporate investment – mainly in the stock markets. The Dow goes up nicely.
Thus, the overall impression given is one of a nation in which both economy and confidence are returning, and there’s plenty of cheap money around with which businesses can reinvest in jobs.
It’s a very smart idea in theory. But in the context of 2011, it’s bollocks….and could very easily be dangerous bollocks.
Number one, it’s too late – and is an idea pretending that the eurozone crisis doesn’t exist. The world is heading into a slump – without entirely unnatural Fed injections, it would already be in one – and in the eurozone it’s been compounded by debt fraud and overly harsh austerity measures. Outside hitech and finance, American products are dated and expensive. The consumption levels just aren’t there to recharge growth, and stock market levels are already ridiculously high because of QE.
Second, will banks pass on the low rates to John & Jane Doe? I doubt it: they’ll use the profit margins to bolster their defences against the euro backwash they know is coming. Oh – I forgot – and for bonuses too. Silly me.
Third, will American households spend based on having refinanced? I doubt it. Refinancing has grown enormously during Zirp…but retail has slumped. People have rainy days in mind: they’re not as dumb as the banks assume.
Fourth, what happens to the US Treasury’s Bills income? With the cost of its deficit going up, and half a trillion about to be thrown at job stimulation, Washington can hardly afford shortfalls at this stage.
Fifth, investors don’t just buy stocks for relative return considerations; in fact, often that’s a lousy reason to buy them. Nope, stock markets react to news, events, outlooks and profit lines. QE kept the profits up artificially, but Corporate America has to start selling stuff sooner or later. That isn’t going to happen: what’s more likely to happen is a stock market sell-off of the banking sector, followed by a realisation that investment funds won’t be there for companies to grow, followed by a general sell-off, followed by a flight straight back into gold and T-Bills, followed by a market crash so severe, several major banks could be overwhelmed by the debt….and the economy will, literally, grind to a halt.
Sixth, is what we need at that stage a USA Treasury where the emphasis of debt has shifted massively from long-term to short term? I vote no.
Finally, I’ve said it before, but it bears saying again: in an economic and financial globalist culture where international memememe greed comes first, second and third, key opinion leaders will fail to act in a way that is good for the nation State. Only a systemic change of business culture – and in particular a rejection of cross-border globalism – is going to solve that immovable object in the way of progress.
This isn’t just an American or indeed a business thing. As I write, Nick Clegg is on the telly saying that the new rural planning rules will give local people more power than they’ve ever had before. That is a matt-black lie. It will deliver power to developers who gave £3.5M to Tory funds in a concerted manner before the last election. This is pay-back time for the exploiters, and pay-back time for thirty years of insane social, economic and immigration policy.
Had we removed any welfare benefit from unmarried pregnancy, rebuilt our manufacturing base, and stopped immigration dead at the start of that 30-year period, we would not need new planning guidelines now, we would not be massively in debt as a nation, and we would not have the number of unwanted kids and other citizens we have. From Callaghan via Thatcher to Blair, Brown and now Camerlot, they’re all to blame for this. The new rural planning rules should be fought tooth and nail, but they won’t be, because too many townies, fat cats and feckless sexual idiots have a vested interest in it going through.