9/19/2012 6:54 PM ET|
Did the Fed just re-elect Obama?
A huge boost of economic stimulus sparked a stock rally just 2 months before the election. This should swing the race to the incumbent. Also: Investing for the Fed's largesse.
We're less than two months from Election Day. We haven't watched the debates. There are hands to be shaken and babies to be kissed. The campaign rolls on in earnest.
Yet the 2012 presidential contest may have already been decided by the Federal Reserve, which just delivered an unprecedentedly aggressive dose of money-printing stimulus with the aim of boosting stock prices and home values, elevating consumer confidence and boosting job growth via increased consumer spending. It will also boost exports. It will encourage new investment by businesses. And it will take the sting out of ongoing federal deficits and a rising national debt by holding down the government's borrowing costs.
In other words, Fed Chairman Ben Bernanke -- an appointee of a Republican president, by the way -- has likely just delivered a second term to President Barack Obama. Cue the outrage, if there's any left after years of government meddling, bailouts, political blood feuds, and bitter partisanship.
The boost from Bernanke
I don't see any way around this reading of the Federal Reserve's actions last week. It announced that, for the third time in in less than four years, it would print new dollars with which to buy bonds in the open market. It also extended its commitment to hold short-term rates near 0% through 2015. (For more, be sure to review my recent video on the subject.)
This differs from the $45 billion-a-month "Operation Twist" initiative (started a year ago and set to run through December) in that it involves an expansion of the Fed's balance sheet and an increase in the monetary base.
It's a much more potent macroeconomic weapon, but it can also do more collateral damage in the form of inflation (which is why gold and silver prices have caught fire lately) and currency debasement (which is why the dollar is flirting with 2012 lows). But those negatives aren't likely to be felt by voters until after the election.
In the meantime, we get the near-term "sugar high" that GOP contender Mitt Romney warned of.
This time, the focus would be on mortgage bonds, and purchases will total $40 billion a month. And this time, the commitment is open-ended and could be expanded if the job market doesn't improve "substantially" according to the Fed's announcement. Merrill Lynch economists are already talking of an expansion of the program in December, increasing monthly purchases to as much as $100 billion. Chicago Fed president Charles Evans said on Tuesday morning that he sees the Fed increasing QE3 by year end on a lack of strong job growth.
Bernanke was coy with the absolutes in the post-announcement press conference last week, leaving Wall Street with the impression he wouldn't stop his monetary flood until the unemployment rate falls to 7%, from 8.1% now. If so, purchases could total as much as $1.4 trillion. If the program is expanded, as the team at Merrill Lynch believes it will be, we could be talking $2 trillion or more -- effectively doubling the Fed's current balance sheet and the country's monetary base, both of which are around $2.7 trillion right now.
For perspective, before the recession the monetary base hovered around $800 billion. That's a lot of extra money floating around.
Depending on Uncle Sam
For Romney, this plays into his meme that America is growing increasingly dependent upon the government. One in seven Americans is on food stamps. One in 16 receives disability benefits. And as shown in the chart below, payouts of government social benefits have been growing faster than wages and salaries for most of the past 30 years.
Source: Federal Reserve
Romney says that 47% of Americans feel "entitled to health care, to food, to housing, to you-name-it" and are dependent on government. That may well be a political gaffe and an overstatement. But what's clear is that we're increasingly dependent upon Washington to boost the value of our homes and our retirement portfolios, lifting our net worth and encouraging us to increase spending in lieu of wage and salary gains. This is the stated goal of Bernanke's latest push. And this is how it will likely win the election for Obama.
It's well known that measures of consumer confidence are closely tied to stock performance. Thanks to the Fed's actions, and the resultant increase in inflation expectations (forcing investors out of bonds and into stocks) and economic growth expectations (pushing up cyclical, economically-sensitive stocks), the Dow Jones Industrial Average ($INDU) is now within 500 points of the 14,000 level. From there, it's a hop, skip and a jump over the 2007 peak to new all-time highs.
Plus, the housing market is finally showing signs of long-term healing, with the Case-Shiller Home Price Index posting its first year-over-year increase since early 2010. And the Citigroup Economic Surprise Index, which measures how the economy is performing versus Wall Street expectations, has crossed into positive territory for the first time since late 2011.
So it's no surprise that the University of Michigan's Consumer Sentiment survey has surged to near post-recession highs, thanks to a bounce in the expectations component. And it follows that Obama is getting a lift in the polls as more and more likely voters, according to a CBS News/New York Times poll, approve of his handling of the economy.
Back in July, as stocks were just lifting off their summertime lows and the economic data were disappointing to the downside, Romney enjoyed an eight-point advantage on the economy and unemployment. This expanded in August to a 14-point advantage. Now, Obama has a one-point lead -- a remarkable turnaround.
The Romney team is trying to adapt and is broadening its singular focus on the economy to attack the Obama administration's record in other areas, particularly foreign policy. I don't know if the arguments in these areas are compelling enough to unseat the incumbent. But they will matter much less if the Dow crosses 14,000, the unemployment rate falls below 8% and home prices keep rising.
VIDEO ON MSN MONEY
Only and idiot can not see though this scam. Odumbo will try anything we as a nation could never have a worse president.
This socialist communist needs to find a country he could live in.
Romney spoke the truth. Now the media tries to make it sound like he is talking about the unemployed. He wasn't at all. He is talking about the Obama left wing extremist welfare crowd that follow Obama.
The unemployed people want to go back to work and will only be able to do that under a real leader.
Come on Nov. 6, 2012.
So America can put an end to Obama's hate on America and Americans.
Example of our dumbed down society. A few weeks ago I managed to have a day off from both of my jobs and went to eat breakfast with my wife. My wife and her sister work at the same restaurant in a small Texas town. As I am eating a young woman with baby talks to my sister in law about how she provides for her baby. She provides for her baby by receiving money from the government and thinks that she is earning the check. My sister tried to politely inform her that she did not earn that check that it was a handout provided by working class who pay taxes. Woman had no clue. Eventually my sister in law had to be led out to take a break.
My question to all of the Americans receiving handouts. What the **** are you going to do if that check (free handout) does not arrive? Time to get the generations on free handouts educated on something other than how to perpetrate fraud on the government and working class. Working class needs to revolt against the rich and the "takers" of this country.
Wait till people realize what another round of quantitative easing will do to inflation; at a time where both food and gas prices are already killing the budgets of many a family; even as against the backdrop of that inflation for which food and gas prices ARE A PART, wages continue to remain as flat as they had been.
The Wall Street banksters will love more of that funny money to float around, but the average family will be a hurtin a bit more due to this glut from the printing presses....
Not a snow balls chance...Obama will not be re-elected....
just 4 reasons...
The so-called 'job creators' better start creating jobs!!! Monetary dilution will disproportionately affect the rich so they better get to it!
sure hope people think before they pull the lever, none of this stimulis **** worked before except to lift the stocks, is their any jobs yet, no, oil still high, yes, is food rising every day, yes. so who cares about the stimulis,? wait till you all get that big ole tax next year for the healthcare you forgot to buy, haha. we are going to fall off that cliff next year for sure, now don't forget to put in the extra money for the lazy **** that doesn't have healthcare, he needs it also.
I was going to vote for Obama until the Fed pulled their latest stunt. I hesitate to call it stimulus, because, the only thing it's going to stimulate is inflation.
I'm now voting for Ron Paul. He won't win, but, at least I'll feel good about my vote for a change.
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