Home > Uncategorized > 2011/10/04: QuickPost: Might Monday Have Been About Obama and Congress?

2011/10/04: QuickPost: Might Monday Have Been About Obama and Congress?

So much of what is ostensibly bothering the economies and equity markets right now is being blamed on Europe. Yet, we still feel that much of the concern should rightfully be directed at the weak outlook for the US economy. The most prominent center of consumption (conspicuous or otherwise) for the other global economies seeming damaged contributes significantly to the sense of weakness elsewhere. The rest of the world may no longer get pneumonia when the US catches cold, but they can surely catch cold if the US has pneumonia.

And that includes the degree to which China is no longer simply cooling, but seems headed for a much harder economic landing than was previously predicted. Of course, there had been some signs of that; most prominently in the last couple of month’s OECD Composite Leading Indicators, which we highlighted when they were released. That had already shown China moving toward a potential real slowdown. Contrary to hopes in some quarters, it was never reasonable that the emerging markets were going to rescue the developed economies. In fact, for all of the fixation on China’s aggressive growth, it is still a relatively small economy compared to the major, mature developed economies. As such, it still relies heavily on its exports to those economies; especially the US.

And what have we seen over the past couple of days? Nothing less than the failure of the US administration and Congress to come to grips with steps necessary to reinvigorate the US economy, and an imperious tone from the President on demanding action on his Jobs America bill during the press conference at the top of his Cabinet meeting yesterday.

After hearing from Dallas Fed President Fischer yesterday about the degree to which the Fed should not be attempting any further major actions, we wonder what we will hear from Chairman Bernanke today? To further convolute matters, anti-Fed Congressman Ron Paul will be exploring the potential to audit the Fed. Talk about basic bad timing all the way around!

As noted previous, there is even a pernicious new phase of protectionism entering the picture. Do we really need a trade war? Someone should illuminate the Congress on a little thing called “Smoot Hawley(same protectionist instincts circa 1930.)

Before we get to our concise view of the background drivers, consider two things. The first is that in spite of all its problems Europe was not leading the way down yesterday, and is not doing so this morning in spite of the spillover weakness from the US. While the December S&P 500 future dropped below its important 1,100-1,090 support yesterday (and continues down today), even the previous downside leader German DAX is only approaching its prominent recent and historic support in the 5,100 area. Similarly for the UK FTSE, it is still more than 100 points above its major 4,790 support.

So there is ample room to consider that at this point at least the US equities’ trend activity is leading the way down. And that December S&P 500 future drop below 1,100-1,090 projects a swing at least down to the 1,038 or even 1,006-00 technical levels from last summer. All of which suggests something else we noted last fall: the Fed’s QE2 liquidity expansion was not going to accomplish much. The proof in the pudding is that the equities are now back down to levels below those at which QE2 was strongly suggested in late-September 2010.

That is why Mr. Bernanke’s testimony today is so important, in spite of the fact he is not likely to suggest any additional strong action by the Federal Reserve. In fact, recent communication from him and as recently as yesterday from Mr. Fisher (and of late from all of the hawks in the Federal Reserve system) is that the economic mess and weak employment are a creation of Congress and the Obama administration, and it’s up to them to address it.

And what do we get in that regard? Mr. Obama’s statement yesterday at the televised press statement opening his Cabinet meeting, “It’s been several weeks since I sent the American Jobs Act to Congress, and I want it back.” He did try to sound a bit more conciliatory than when first offering the bill as a straight “take it or leave it” measure, as he mentioned he would be discussing with congressional leaders from both sides of the aisle whether there were some aspects of the bill that might be changed in order to facilitate its passage.

That said, it is common knowledge that the tax increases within the bill are just not going to fly with Republican Right. Equally as challenging is the degree to which the Democratic Left is not going to be happy voting for anything that does not include a greater contribution from the “rich”. As if that were not bad enough, it’s a preview of what to expect as the reason the US fiscal reform Super Committee is going to find it very hard to craft a compromise that actually accomplishes another $2 trillion worth of “savings” from the baseline budget for the next 10 years. (Which is to say less accumulation of additional debt, not the actual reduction of the overall projected debt level.)

All of which gets us back to our consideration that may be yesterday’s significant drop through critical supports in the December S&P 500 future was less about Europe, and more so about the US. That is reinforced by the degree to which the Europeans seem to be (however incrementally and painfully) finally cobbling together the address of the near-term sovereign liquidity concerns, and even the economic data yesterday was actually better than expected; including nothing less than the global Purchasing Managers Indices of Manufacturing, where the US was actually up to 51.6 instead of dropping below 50.0.

As we noted in one of our recent analyses, “what happens when ‘good’ markets go ‘bad’?” They fail to respond positive news. The fact is simply that the outlook rather than the current situation in the US is what is troubling a lot of the rest of the world as well as domestic prospects. The bottom line is that the anticipated future regulatory burden on many fronts in the US will keep its businesses from investing and hiring until the political class provides some real relief and clarity.

While we covered quite a bit of that in yesterday’s post, it is also important to note that the scheduled Senate vote on those currency “under valuation” calibrated duties on Chinese exports is receiving more attention in the mainstream press. As noted in that post, whether anyone can actually come up with a real world determination of the degree of “under valuation” of a currency is extremely problematic. And for all the reasons discussed yesterday, that entire effort is a very toxic influence at a time when the Chinese economy is also seeming to weaken more than was previously expected.

Hopefully the more highly informed members of the Senate who understand the last thing we need right now is a trade war with the fastest growing consumer economy in the world will prevent this from passing...

…as it is already on the Senate floor (i.e. out of committee), pending a vote at any time!!

General Market Observations

Significantly the same as in yesterday’s post, other than the further evolution of the US equities trend reviewed above.


Significantly the same as in yesterday’s post, other than the further evolution of the US equities trend reviewed above.

Thanks for your interest.

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