All Clear in Europe?
By Surly Trader
Not so much…
Italy and Spain are still waiting for some tremendously good news (as referenced by their CDS spreads shown below). Aside from the European disaster, we should probably be focusing on the elections and the coming “fiscal cliff”. As we all witnessed, when the federal reserve did not expand its “quantitative easing”, the market was disappointed. We also know that Ben is the maestro when it comes to non-traditional monetary policy. If Romney wins, he has already stated that Ben is out. By itself that might have interesting implications for the market.
The larger overhang comes from the automatic expiration of many stimulative policies in early 2013 which have been estimated to be a 4-5% negative GDP drag if they all expire. That is a huge uncertainty that can only be solved by productive political arguments over the next 6-12 months. How likely is that in 2011? How likely is that in 2012 during an election cycle?
(Italy & Spain CDS Spreads)
Lastly, we have the same debt ceiling issue coming to the forefront in September. The first go around caused a tremendous amount of nonsense in the markets. Why exactly with this debt ceiling expansion work out better?
Durable goods orders were great though, that should boost us! That optimism fades a bit when you look at the citigroup economic surprise index…
6 Comments
Doubtful that they can find a solution in the near-term. And that means more turbulence ahead.
I just saw Stephen Roach on Bloomberg TV. He said there is no quick fix for the Europe crisis. He said unequivocally that Europe’s economy will have a lost decade like Japan — there is no way for them to avoid it.
If Europe does have a lost decade of virtually no growth, then how long will the US stay decoupled? Roach answered by saying that over the 3 yr US recovery, our average growth of 2.4% would have been only 1.4% without the growth in US exports overseas. Now we are facing negative growth in our US exports due to Europe & slowing China. So a reasonable growth expectation for the US is down to only about 1%.
Lets rephrase your last sentence to read this way:
So a reasonable growth expectation for the US is down about 50%.
This also has interesting implications for the election itself. Will Ben go nakedly political and do some titanic stimulus plan just to get Obama reelected so Ben can stay in power? I have long suspected that Romney’s declaration that he won’t reappoint Bernanke was a grave strategic error on his part. The Fed is the 4th branch of government, and they can make or break presidents.
“If Romney wins, he has already stated that Ben is out. By itself that might have interesting implications for the market.”
The question is: does Ben have enough votes on the FOMC who would go along with a massive QE3 type of Fed stimulus? I’d say no right now. But if all hell breaks out and the market tanks, the FOMC would probably go along with Ben and pull the trigger on QE3.
Romney will not elected now that his has declared to remove Obamacare as soon as he gets in to power……………..very stupid statement to make