James Pethokoukis

Politics and policy from inside Washington

Tough to be bullish on Wall Street if you’re bearish on Washington

Aug 16, 2011 20:01 UTC

Why is Wall Street so worried these days? Investment strategist Jason Trennert of Strategas Research Partners offers a crackerjack bit of analysis. Even better, he turned bearish on Aug. 3, the day before the stock market began its stomach-churning roller-coaster ride (via Yahoo Finance):

So what’s Trennert’s theory of the case? Wall Street is worried about Washington (and Brussels, too).

1) We assumed the debt ceiling bill would include some form of “stim-sterity” – a combination of targeted near-term stimulus and long-term spending cuts. The structure of the debt ceiling agreement will make pro-growth policies far harder to achieve, subjecting the economy to the full brunt of austerity measures in 2013 and 2014.

2) While we will all receive a welcome respite from the internecine battles in Washington for the next month, the 2012 Presidential election cycle will kick-off in earnest over Labor Day. It is likely that the entire focus of the election will be on the size and role of government. Perhaps more important for the performance of the market in the short-term, however, is that the Congressional committee charged with coming up with an additional $1.5 trillion in spending cuts is likely to be fractious enough to lead to what we might term the “Amity Shlaes” problem1 - the uncertainty and the unpleasantness surrounding the nature of future cuts in spending is likely to lead capital to go on strike. Despite the strength in corporate profits and large cash balances, most businesses will be unwilling to hire in great numbers or seek to expand their operations until they have a better idea of what the new “rules of the game” will be.

3) The sclerosis in business decision-making will be coming in the context of a maturing business cycle. The recent GDP revisions, ISM figures, and employment numbers underscore the vulnerability of the U.S. economy.

4) The “bill” for wanton fiscal profligacy in Europe has already arrived. A combination of tight monetary policy from the ECB, an over-valued Euro, and significantly higher long-term interest rates in Greece, Ireland, and, more importantly, Italy makes the chances of a full-fledged recession in the EU high. America’s fiscal “crisis” is currently not nearly as serious as the credit crisis taking place in Europe. This is mainly due to the fact that the U.S. debates are being played out among two different sets of borrowers (Republicans and Democrats) rather than the far more typical tension between borrower and lender. American interest rates have, as a result, stayed low, while European interest rates have soared.

Both the stock market and “real economy” are screaming for pro-growth policies: deep and permanent tax cuts, regulatory reform, entitlement reform. And the sooner, the better. The top event that could change Trennert’s mind-set to positive from negative: “A bipartisan effort aimed at pro-growth policies designed to encourage capital formation and, by extension, employment.”

But it doesn’t look like much of anything meaningful will happen until at least 2013.  For the moment, Team Obama is playing small ball, as it tries to squeak out a narrow electoral vote victory in 2012. No wonder Wall Street has been slashing its economic forecasts. Strategas, for instance, has increased its odds of a recession in 2012 to 35 percent (from 20 percent) and its odds of a recession in 2013 to 60 percent (from 50 percent). Indeed, if you look at the typical frequency of recessions, the U.S. would actually be due for one in 2013 — exactly as Strategas predicts — even though the current recovery more or less feels like an extension of the 2007-2009 Great Recession. If Trennert’s right, we just might have to change that name to the Long Recession.

Perry vs. Romney on Ben Bernanke

Aug 16, 2011 19:03 UTC

Gov. Rick Perry’s tough comments on Federal Reserve Chairman Ben Bernanke are another sign that the Fed and monetary policy will be big topics in the Republican primaries and the general election. There is certainly a stark difference between how Perry talks about the Fed, and how Mitt Romney does. First, here is Perry from yesterday:

If this guy prints more money= between now and the election, I don’t know what y’all would do to him in Iowa, but we — we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion.

Now here is Romney from April on CNBC’s The Kudlow Report:

Kudlow: What kind of job is Ben Bernanke doing right now? The guy is depreciating the dollar, we’re seeing this huge inflation of energy prices, including gasoline prices at the pump. What do you think of Ben Bernanke?

Romney: I think Ben Bernanke is a student of monetary policy. He’s doing as good a job as he thinks he can do in the Federal Reserve. But look, I’m not going to spend my time going after Ben Bernanke. I’m not going to take my effort and focus on the Federal Reserve. I gotta focus on my effort on the administration.

Romney’s comments kind of reflect what many mainstream Republican-leaning economists believe, that overall Bernanke has been an effective central banker, particularly during the nadir of the financial crisis. Romney’s comments may also reflect a belief in the value of maintaining Fed independence. And I highly doubt Romney wants to “end the Fed” as Ron Paul does.

On substance, Perry is correct. A strong argument can be made that the Fed’s bond buying caused inflation to flare, squeezing consumers and slowing the economy. (Interestingly, the president of the Dallas Fed is also against more QE3 bond buying.) But on style, Perry didn’t need to go there. I think that sort of loose talk sets a bad tone for the political debate. Also, if Perry should become the 45th president, he’ll need a Fed comfortable with eventually withdrawing stimulus without looking over its shoulder at the politicians. So if Perry’s savvy, maybe he’ll offer Bernanke an apology – and maybe send over a big mess of Texas barbecue while he’s at it. But I doubt it. Here is Perry spokesman Mark Miner:

The Governor was expressing his frustration with the current economic situation and the out of control spending that persists in Washington. Most Americans would agree that spending more money is not the answer to the economic issues facing the country.

Let me also add that I don’t think Bernanke will serve another term as Fed chairman beyond the current one. First, I hear he doesn’t want another term. Second, he probably couldn’t make it out of a GOP-controlled Senate or even one where Republicans have enough votes to filibuster. Certainly among Tea Party activists, there is a strong belief that the Fed should be shuttered.



I disagree with the policies of Bernanke of just printing money with out capital that what Bernanke is doing is trecerous agreeing with Gov Rick Perry from Texas.

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