This shark – swallow you whole.
- Quint, “Jaws”
We often hear government economists and policy makers express concern that market turmoil might “spill over and affect the real economy,” an Orwellian locution where the price of oil spiking over $110 is seen as a “market dislocation,” and not as a multi-billion dollar tax on America’s middle class.
There have been measurable benefits from government programs going back to the first responses to the crisis under Treasury Secretary Paulson, though largely of dubious value. The fact that we spent a trillion dollars to keep a bunch of bankers employed, while technically a win for the nation’s employment statistics, was arguably not the application that would have attained the utilitarian goal of the Greatest Good for the Greatest Number.
Last week saw a convergence of data points that all point to the likelihood that Chairman Bernanke wants to retain Friends in High Places, assuming that his legacy will be set not by those who write history – and especially not by those who live it – but by those who decide what gets published. (Quoth the Duke of Gloucester, patron of historian Edward Gibbon, upon being presented with the completed Decline and Fall of the Roman Empire, “Another damned thick, square book! Always scribble, scribble, scribble, eh?”)
We don’t mean to scoff at the very real suffering caused by economic collapse, but Hedgeye holds firm to the view that government meddling in the economy is generally not a good thing, and that a long-term program of persistent government meddling in the economy is a decidedly harmful thing.
Government intervention has the predictable effect of shortening economic cycles, while also increasing volatility – perhaps two sides of the same coin of time compression. In consequence, it also has the predictable effect of generally not really fixing anything and of battering the middle class, edging them nearer to the abyss with each new policy nudge.
By the Fed’s own reckoning, each successive round of QE has a diminishing impact on the markets. Mind you, that impact is measured in basis points – one-hundredths of a percent – and the twenty-five basis point impact looked for from any future round of QE is not predicted to last. The banks are still not lending, largely because of uncertainty over government policy. But don’t blame the banks. People aren’t borrowing, for much the same reason: no one wants to take a loan to expand a business that might be shot execution style by the Fed suddenly reversing its interest rate policy.
So, if the Fed’s easy money policy is not supporting the “real economy,” who is benefitting from it?
Most excess liquidity seems to be supporting the short-term trading of major financial houses – which helps explain the furor over the Volcker Rule, designed with the sole purpose of walling off risk trading from deposit taking (a proposition that a tenth-grader could clearly articulate in a single sentence – do you know a tenth grader who wants to be President?)
Wealthy folks are going to get wealthier through this artificial inflation in asset prices. This has been the effect of each previous round of money printing, and is likely to continue. But each successive round of QE also takes a moral chunk out of the nation’s Middle Class, not to mention shredding American credibility in the global marketplace. Our markets used to be the gleaming city on the hill. Now they are just the Best House in a Bad Neighborhood. How long before they turn into a slum?
Hedgeye’s institutional clients were treated last week to an exclusive conference call with George Friedman, founder and chairman of Stratfor, the global intelligence and strategic risk assessment consultancy. Friedman says the decimation of the middle class brought about by government neglect and economic malaise has historically been a key indicator of pending social unrest.
We think America still has a way to go before chaos strikes, but we remember that Secretary Paulson got Congress to trigger TARP by predicting there would be marshal law within a matter of days – a dire prediction that this nation’s leaders bought into. TARP was passed with a large number of legislators never having even read the bill.
If you were worried that Washington might actually get some control over Bad Actors in the financial sector, you can breathe easy. All that posturing and crying “Sh*t!” in a crowded Senate hearing made for mildly engaging reality TV, but in the end Business As Usual remains the mantra in the City of the Perpetual Extended Palm. (For colorful commentary on the Senate financial crisis hearings, and other Washington-to-Wall-Street low points, see the Hedgeye e-book Fixing A Broken Wall Street).
Bernanke’s fiddling in the system has the effect of trashing the Dollar, and of spiking asset prices – the value of stocks in your 401(K) just went up, but so did the price of gas, effectively an instantaneous tax hike. By creating waves of volatility in the markets, Bernanke is doing his utmost to keep the bankers banking and the traders trading.
To return to scary summer movie metaphors, while you are out frolicking in the surf, why are the Central Planners avoiding the sunlight? Are they vampires, or do they just not like being around We The People? Be careful out there: even at low tide you won’t see the shark until it’s upon you.