Friday, May 25, 2012 – It's Better Than It Looks, Striving For Happiness Amidst the Cow Pies - by Sinclair Noe

DOW – 74 = 12,454
SPX – 2= 1317
NAS – 1 = 2837
10 YR YLD - .01 = 1.75%
OIL -.06 = 90.60
GOLD + 15.90 = 1574.70
SILV +.21 = 28.63
PLAT + 14.00 = 1436.00

For the week, the S&P 500 rose 1.7 percent.  I'm of the opinion that life is better than it appears. We look around sometimes and the world can seem scary. Sometimes we have to look a little deeper to find the good, the decent, the delightful and the potentially pluperfect.

And that brings us to today's topic on the possibility of the Federal Reserve pumping money into the banking system through asset purchases, in other words, Quantitative Easing Part 3. Inflation expectations are falling, if you consider Treasury bonds as a gauge of inflation. The lower outlook for inflation gives the Fed wiggle room to stimulate the economy. Although, right now the Dow looks like a better QE indicator, and it is not indicating QE. The banks can always make a case for QE, but what about the Fed officials who make the actual decisions?

St. Louis Federal Reserve President James Bullard says he expects the U.S. economy to perform better than many forecasters anticipate and that the Fed will therefore need to raise interest rates in late 2013, not late 2014 as its policy committee is currently indicating.

Minneapolis Federal Reserve President Narayana Kocherlakota thinks the current labor market performance is much closer to maximum employment than the data alone would suggest. A few weeks back, Kocherlakota said the Fed should start looking at tightening monetary policy in the next six to nine months. He said he saw inflation at around 2% this year and 2.3% in 2013, numbers that signal the need to start exiting the central bank’s current ultra-easy policy.

New York Federal Reserve President Wiliam Dudley says:“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front.” Dudley thinks economic growth at around 2.4%, is sufficient to keep the central bank from easing monetary policy.

Overall, the chatter from the Fed-heads seems sanguine. That could change before the June FOMC meeting. The monthly jobs report always carries the potential to shake a Fed governor to the core. The next FOMC meeting is June 19. The Greeks vote on June 17. Anything that can happen in 2 days would be addressed with liquidity programs, not easing, and liquidity programs have not needed FOMC meetings to be put into effect in the past. Fed officials know the timing of the Greek vote, and typically want to see the impact of events over time before responding with monetary policy tools.

Still, the Euro-leaders seem determined to impose austerity on the peripheral countries with pure cut off your nose to spite your face sensibility. Things in Euro-land could get nasty fast. The whole Lehman Brothers collapse was nasty fast; it could happen again. The Spanish word for Lehman is Bankia; the fourth largest bank in Spain has been nationalized; trading has been halted; they will be receiving a $24 billion dollar injection of cash recapitalization. And the recent JPMorgan bungle was a vivid reminder that Too Big to Fail banks still pose a very real systemic threat. Plus, it might shut up Jamie Dimon from whining about financial reform. Maybe Dodd-Frank and Glass-Steagall wouldn't have prevented multi-billion dollar losses, and still growing but now Dimon's argument sounds like someone debating we shouldn't have seat belts because they wouldn't have prevented Hurricane Katrina.

Still, absent a big dose of nasty, the situation is fairly good for us. We head into the Memorial Day Holiday with an improving jobs picture, low inflation, plenty of softness in the economy but not enough to warrant QE3 at this precise moment. And with global turmoil, strife, and trouble, money is looking for a safe haven and that not only props up the US economy but also QE3 would spoil the illusion and send money looking for safety elsewhere; that kind of a hit would be worse than the jolt of stimulus from QE3. Of course, the Fed is still accommodative and they still have an implied put in place and they're still printing money at a prodigious clip; but we're not spending with the recklessness of the recent past.

There’s a confused and confusing debate going on over whether President Obama has presided over a “spending binge,” as Republicans claim, or whether, under Obama, “federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.”

The key is fiscal year 2009 -- and who you blame for it. By any measure, spending popped that year. If you’re looking at raw dollars, it rose by $535 billion. And “the 2009 fiscal year,” writes Market Watch’s Rex Nutting, “which Republicans count as part of Obama’s legacy, began four months before Obama moved into the White House.”

That’s true: The federal fiscal year stretches, somewhat weirdly, from October to September. So fiscal year 2009 began in October 2008.

And that’s the point of Nutting’s analysis: if you attribute most of fiscal year 2009 to George W. Bush then, after adjusting for inflation, federal spending under Obama has actually dropped by 0.1 percent. Politifact checked the numbers and agreed: “Using raw dollars, Obama did oversee the lowest annual increases in spending of any president in 60 years,” they write. “Using inflation-adjusted dollars, Obama had the second-lowest increase -- in fact, he actually presided over a decrease.”

The real issue is that 2009 is an anomaly driven by crisis. The Bush Administration screwed it up and drove the spending much higher. Obama stayed the course.

The question is where should spending be now? The Obama administration wanted it to be higher. After all, unemployment rose through 2010, and remains high today. It has proposed a raft of additional stimulus bills since 2009. Republicans in Congress, however, refused to pass most of their plans, and NOT because they had an epiphany on fiscal discipline; past action refutes any non-politicized argument. The lower spending numbers are due to Republican obstructionism but they're afraid to acknowledge the lower numbers, much less take credit for them – which would be an admission of responsibility for failed policy. Instead the Democrats are touting the lower spending numbers when in fact it is numeric proof they've had their legislative agenda and economic plans hoisted on a petard. Washington is so full of cow pies, they are unavoidable. And so the Fed is sitting back waiting to whitewash the lack of fiscal policy. It isn't exactly the checks and balances envisioned by our founding fathers but so far the tapestry is only slightly raveled.

And still, we head into the weekend with the price of oil in a nifty decline, and I don't know who to thank for that but I'll take it. The price at the pump is almost bearable except my long-term memory hasn't faltered completely, and for this I find comfort. The weather looks good for a barbeque. Speaking of long-term memory, this is the first Memorial Day in 10 years that the US hasn't been at war in Iraq. There are approximately 23.4 million US veterans, 1.7 million of whom served in Iraq or Afghanistan. And because of everything they gave, we have the freedom to do whatever we want, more or less. And now our Iraq War vets can spend the holiday at home. That's good. We have the choice to get buried under the negatives or we have the choice to strive for happiness. I'm pretty sure there is empirical evidence that the standard of living is improving. I'll look it up some day but for now I'm of the opinion that life is better than it appears. That's my story and I'm sticking to it.