In a Depression, Employment is a Fiscal, Not a Monetary Issue
I feel like I need to repeat myself somewhat today so I have brought back the title from November 15th, the first tme I have done that in this blog. Under this title some new things need to be said.
First, the deficit reduction commission is a good long term fiscal idea. It needs to get implemented for the long term strength of our nation, but one needs to recognize that it is a purging process and markets don’t rally during purges.
Second, my evaluation of the Fed has gone back and forth since the market bottomed in March 2009. I didn’t go back to be sure of dates, but I would say that roughly for a year, between March 2009 and March 2010, I have lauded Bernanke and the Fed. Since then however, the wheels have started to come off as the Fed got frightened by the stock selloff that started in May 2010. I use the gold chart as a measure of how well the Fed is doing and the results have been dismal since May. We have talked about this before, but Bernanke seems to feel that he should be the answer to gridlock in Washington. In my opinion, he is charged with providing a stable money supply and should make it clear that Washington is charged with providing policies and direction to deal with a turnaround in the economy and employment. As such since they did that earlier, the Fed should now stand aside.
Third, tax policy is the current whipping boy in regards to turning the economy around. Supply Side Republicans believe in trickle down, a concept that works if you ignore deficits and focus on growth. (just look at deficit numbers from 1982 to 2008). Tea Party Republicans want to reduce deficits although they are not sure how or what the effects on growth will be, (although down in the short-term 3 to 5 year window would be a good guess.) Democrats are motivated by infrastructure growth possibilities and while that has stabilized the economy it does increase the deficit in the short-term. So a deficit battle will be central in 2011.
Fourth, Short-term, 6 months or so, expectations of private company growth will no doubt provide some buoyancy but after that the rubber will meet the road and the Fed will be done with phase one of QE2.
Stock Market and Commodity Expectations:
I will stick my neck out and say that my optimistic forecast is for a three year range of 850 to 1290 on the S&P 500. The swing point of 1070 sits just above the pre QE2 support level at 1050.
As to commodities, most if not all of the QE2 move is over, I strongly discount Goldman Sachs $ 110 dollar oil forecast..