Home > Uncategorized > 2011/09/18: Weekend Thought: During His Jim Cramer Interview, Secretary Geithner Spilled the Beans

2011/09/18: Weekend Thought: During His Jim Cramer Interview, Secretary Geithner Spilled the Beans

Quite a bit of softball questioning, and others that were leading insofar as they allowed Treasury Secretary Geithner to promote the administration’s renewed stimulus agenda. Nothing necessarily wrong with that; high-level political interviews are after all the art of the trade-off.

However, some of the questions were so generalist as to be meaningless. “Europe alive or dead in three years?” We presume Mr. Cramer meant “the Euro-zone”. And of course the correct answer is “absolutely“, without having to qualify in what form. While they agreed that would include saving Greece within the zone, we are not so sure (and will have more to say on that sometime soon.)

And one of the most telling insights from the interview came in response to one of those seemingly softball questions regarding why the administration’s new jobs initiative must be passed to avoid crippling economic weakness. It was less about the specific benefits or costs of the program, and more so about an aspect of the general economic context that very few have been willing to explore.

It was the degree to which the US economy is not going to achieve the sort of growth that will allow for the desired major rebalancing under any of the current fiscal reform programs. And that is because they ALL (Obama, Ryan, Simpson-Bowles, Rivlin-Domenici, you name it) base their assumptions on sustained 4.0% US growth.

In addition to discussing the near term prospects, the Treasury Secretary specifically noted that we are not likely going back up to that sort of growth. As an aside, it is also the case that most credible economic observers now allow that the only time anyone presumed previous that this was possible was during the steroidal growth distortions of the Dot.Com Boom and later Housing and Credit Bubble.

Of course, it is also tragi-comic that official US Treasury Department perspective is delivered in a “lightning round” with an acknowledged short term trading guru. And here is the transcript directly from late in the Wednesday, September 14th CNBC Jim Cramer interview (© 2011  CNBC LLC. All Rights Reserved.) …right about where Secretary Geithner ‘spills the beans’ (American colloquialism for ‘exposes the truth‘).

JIM CRAMER: All right. Last lightning round question: If you do not get your jobs program passed, does it increase and increase dramatically the chances of a recession in 2012?

TIMOTHY GEITHNER: If we do not pass a package this large and this powerful, than economic growth in the United States will be weaker. No doubt about it.

JIM CRAMER: But does that mean a recession? Is a recession in your realm of odds? Do you tell the President: Look, we are this close to recession; we must get this done?

TIMOTHY GEITHNER: Let me say it a little more carefully. If you look at the average of private economists and then think about the outlet for growth in the United States for the next 18 months or so, I think they’re largely in the 2 percent range now. 2 percent is just below potential growth in the United States.

Growth should be stronger for an economy coming out. You can’t beat 5 percent, but it should be stronger than that. And what this package will do is not just buy some protection from the trauma you see in the other parts of the world, not just buy some insurance against the risks that other things could happen, and we can grow it, but it will make the economy strong in the near term. And that’s good prudent policy now as long as you combine it with things that make sure the long-term is better. (End of interview excerpt; our boldface and italics.)

Soooo, if the good Secretary allows that we are not even going to exceed 5.0%, how do we get to 4.0% sustained growth that is assumed in the various fiscal reform programs? Answer: we don’t. We are in the heart of a major cyclical credit deleveraging, and the current administration and the rules and regs it pushed through Congress in its first two years of its tenure are weighing heavily on businesses and especially banks.Taxulationismis a fact of life.

And that lack of growth is the real reason why further fiscal stimulus is necessary now, and will remain necessary for some time to come. Of course, there is a path to restoring the sort of growth that will help both economic and fiscal prospects: a major regulatory rollback. However, with each side of the political divide locked into playing the ‘blame game’ in front of the 2012 US general election, the chances of the administration backing off from Obamacare and other regulatory initiatives are classically ‘slim and none’ …and Slim just left.

As noted previous, in between the occasional outbursts of bonhomie, each side is significantly obstructionist. Each is committed to only implementing the absolute minimal changes that would otherwise embarrass them, and hoping that the voting public hates the other guys more than them the next time they step into the voting booths. What a way to run a country. That is also the reason we remain quite so skeptical on the US economy and equities.

As a final note along the same lines, this is the reason the Fed feels compelled to attempt more ineffective flailing on the monetary and interest-rate side. And it seems they now have the Treasury Secretary’s cooperation in not countering ‘Operation Twist’.

Treasury has tacitly committed to work with rather than take steps that would neutralize the incipient Fed plan to push up long term bond prices (i.e. lower interest rates.) This is not a criticism of the Treasury; they’re just playing along. But the bond support programs to date (QE1 & QE2) have hurt the bonds, and seen inflation of risk assets and equities.

Of course, that’s because ‘free’ money is only willing to speculate on short term returns while there is no way to sensibly ‘invest’ in the real economy right now… thanks to the statist approach of Washington DC.  Yet this is not a big problem for the Fed, because Ben Bernanke has already provided the ‘portfolio channel’ cure* to damaged pension investments earlier this year; and he’s not running for re-appointment anytime soon, if indeed ever.

Yet, that leaves a bit of a mystery. He has lately indicated (at long last) that US economic woes are a creature of Congress, and they’re on their own to tame it. And the US is not in a crisis of high interest rates or lack of available capital. And no cheaper mortgages will help those in dire straits due to job loss or even insecurity, or get businesses to hire. So why would Mr. Bernanke put the Fed at further financial, reputational and political risk by collaborating in another form of liquidity infusion that’s unlikely to help the economy?

(*That ‘portfolio channel’ aspect of the Fed’s desire to inflate markets that were flagging in the summer of 2011 was first pointed out by Yra Harris. His blog “Notes from Underground”  is also excellent insight for anyone interested in very timely opinion on the evolution of all of the main global capital market asset classes. He is especially adept at tongue-in-cheek yet incisive observations on what the central banks are up to, implications of foreign exchange trends,  and which official positions are untenable. Just click the right-hand column link in The Blogroll to get there.)

General Market Observations

Our skepticism of the equities is also based in part on the degree to which the recent rallies have only come in the wake of Euro-zone Debt Crisis mitigation moves. Not that these are not helpful in stemming the worst near-term implications for the global financial system and economy. It’s just that they do not amount to anything that’s going to restore strong growth within a major cyclical credit deleveraging compounded by pro-cyclical fiscal retrenchment.

And that means last week’s equities rally looks a bit suspicious in the context of other asset classes’ performance into the end of the week. Equities were up at the highs of the week essentially due to the better sentiment created by the major international central bank commitment to extended liquidity loans to troubled commercial banks. Fair enough, as removing the potential for a credit market lockup due to the lack of trust in certain European banks created a more constructive psychology. Not a big surprise that this squeezed the aggressive equities bears.

That said, further issues surfaced late week in Europe revolving (for the umpteenth time) around just how timely the Euro-zone participants would make a final decision on the next tranche of bailout funds for Greece. Europe seems outstanding at nothing quite so much as ‘snatching defeat from the jaws of victory‘. And that was right in the midst of US Treasury Secretary Geithner pointing out the degree to which timely action was necessary to restore confidence. What in that suggestion could’ve possibly been construed to mean delaying the decision from this month into October was a good idea?

So even though the S&P 500 and the DAX were both up at the highs of the week, they were also right into their next significant resistance. That is especially important for the downside leader DAX, which will need to make immediate further upside progress this week in order to avoid all of last week’s rally turning into nothing more than the next minor correction in the most aggressive bear equity index.

And unless something changes with the other asset classes, all of the indications elsewhere seem to suggest the equities rally was indeed only the extended portion of a week long bear squeeze. Government bonds and Gold and the US Dollar Index were all up, while energy markets faded from the highs of a rally. That is all the sort of intermarket activity that would normally accompany weakness in equities.

Reinforcing that is the degree to which commodity currencies were only up slightly from their recent weakness, and the Japanese yen was generally maintaining its ‘haven’ bid (typically more prominent when equities are weak.) So in spite of the equities finishing the week at their highs, something likely has ‘gotta give’ fairly early in the week on currently conflicting intermarket tendencies.


Once again, the most interesting bit is the December S&P 500 future pushing back up near the important 1,216-30 lead contract resistance. If it fails to penetrate it on the upside, then in spite of the rapid recovery from last Monday’s retest of the 1,130 area, the overall pattern might only be turning into a rounding sort of continuation activity (Scallop) prior to the next major downdraft. Yet, even that tends to evolve as a two-way trading affair which will likely respect the August lows until weeks from now. On the other hand, if it does penetrate the 1,130 area to the upside, it might be able to extend the rally up to either 1,245 or even the 1,260 area.

More troubling for anyone who is hoping for more bullish equities activity in the near term is the fact that the aggressive downside leader DAX getting back to its low-5,600 area resistance maintains a very weak trend momentum overall. That is because since the equities all hit the initial bottom back in early August, DAX is the only one to consistently exhibit modest new lows on every subsequent selloff. This has left it in what we call a Declining Flag. Instead of putting on a countertrend to the upside since early August, it has remained in a well-defined (if admittedly wide swinging) near term downward channel (i.e. the mirror image of the S&P 500.)

And coming in Monday morning the downward trendline off the mid- and late-August reaction highs is at 5,619; which works hand in glove with the Fibonacci 0.25 retracement of the entire selloff from the May high to a new low for the selloff early last week. It’s going to be interesting, especially in light of those contrary intermarket indications from the other asset classes.

Briefly on those other fronts, it was interesting that the December T-note future only recovered modestly from its 129-00 support, which left it well-off the more important recent and historic 130-20 resistance. Not surprisingly, the US Dollar Index held support back near the low end of the important .7680-00 area on Thursday, and actually has further support as far down as the .7550 area. That works hand in glove with the continued weak performance of the commodity currencies (likely indicative of weak economic expectations), and the fact that EUR/USD only barely made it up to the 1.3900 area on Thursday, even if residual resistance is as high as the 1.4000-1.4100 range.

Also reinforcing the weakish economic expectations, November Crude Oil slipped once again on Friday from repeated tests of the important 89.50-90.00 lead contract resistance in spite of equities strength. Due to the contract expiration rollover, lower support is now 86.00 and once again into the 83.85 lead contract dip low (from back in February.)  Similarly, in spite of the bid in equities, the October Gold future managed to recover back above its 1,800-1,790 support, which was temporarily violated on Thursday. Whether it can put on a rally back into its major 1,886 Objective once again likely also rests with whether more of a crisis atmosphere returns sometime soon. That obviously does not include much further strength in equities.

Thanks for your interest.

    September 19, 2011 at 12:07 PM

    If I may solicit your opinion, what do you make of the recent bill prpoposal by Barney Frank (?) to alter the ways the FOMC members are elected / appointed? Away with the FED independence?

    • September 19, 2011 at 2:21 PM

      Another matter of substance that’ll wait until after 2012 election. And as concerned about Ron Paul politicizing Fed right now as Democrats.

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