Market Talk

Corn’s at an all-time high, supposedly on surging demand.

But just remember that whatever such increases there are, it’s primarily not going into people’s bellies, but their gas tanks just as crude oil is reliving its 2008 superspike.

Haven’t we seen this movie before?

We’ve been bellowing (and we’re not totally alone on this, as the Bank of Japan’s recent report shows) about how QE has been cascading untold liquidity into the financial markets, allowing for stocks to nearly double the past two years and commodities to surge toward, or past, their 2008 peaks. Much of the thanks for that can go to the nation’s central planners bankers, and the free-money bonanza of the last decade.

We’ve long plowed the road here of how the Federal Reserve helped goose the credit markets that allowed for dodgy borrowers to get dodgy mortgages. Then even-dodgier securities were created for “sophisticated” investors looking for the next best thing.

But the half-wits in Congress — dithering over how to cut a few billion here, a few billion there as shut down of the US government looms — have commodity-spike blame as well. Beyond refusing to enact trade deals that would boost US exports and potentially help develop new supplies of commodities in those markets, we get things like farm subsidies that incentivize not raising crops or animals and laws requiring ethanol — largely developed from corn — to be added to gasoline while its benefits are in question.

So until we get enough grown-ups on Capitol Hill and in the halls of the Federal Reserve able to bring about responsible policy, the likes of Dallas Fed President Richard Fisher will seemingly just be playing the role of graveyard whistlers or token dissidents while crony capitalism lives on and fans the flames of inflation.

Hopefully it’s not like the 1970s. Not like I would remember, being a tyke back in those days. But there’s no need for me to get first-hand experience, thank you.

Our colleague Michael Derby has this overview of Fed Chairman Ben Bernanke’s testimony up on Capitol Hill this morning:

In testimony before Congress, Fed Chief Ben Bernanke says he sees a continued US recovery and expects inflation to stay contained. But he also warns sustained commodity-price increases could threaten the recovery and warns the central bank won’t allow inflation to take hold. Most of Bernanke’s comments on the outlook hew closes to things he and other Fed officials have said. Put another way, the remarks are no game changer, although they do reflect the increased attention paid to commodity prices.

The two most interesting topics today and tomorrow are likely to be the end of QE2, and commodity prices. On the former, you may get a hint or two, but that’ll be it. On the latter, the Fed chairman is still holding to his opinion that Fed policies are not the cause of the inflationary wave that’s spreading across the globe.

I just don’t know where to go with that. The Fed’s been trying like madmen for the past two years to spark inflation, given they’re terrified of deflation. The dollar is the world’s reserve currency. Most markets trade in dollars. Bernanke can do the “Huh? Wha? Don’t look at me” bit, but it’s not a very convincing act.

Some Bernanke/unemployment-type links for your reading pleasure this morning:

- Real Time Economics is live-blogging Bernanke’s testimony.

- WSJ’s Joe Light, with whom we wrote Monday’s Upshot column, has a post at Real Time Economics, “Why Aren’t Employers Hiring?” The post won’t come as a surprise to readers of this blog, but the comments are very enlightening, and I recommend you read through them.

- And if you want to see the Ron Paul’s kill-the-Fed-fest, the committee’s got a link to a webcast on its website.

Here’s an interesting tidbit (subscription required) from the hearing, from Newswires’ Michael Derby:

Bernanke appears to suggest QE2 will meet its $600 billion target and go no further. Bernanke’s said QE2 can likely be brought to an end if the recovery is moving forward and inflation remains low and stable, and said an unwind would likely begin if growth surged and inflation jumped.

The QE2/QE3 debate is going to be heating up over the next few months, but the even bigger issue, hardly being discussed at all, is the fed funds rate. It’s still at zero, and so long as it is at zero, official Fed policy is just blowing bubbles. Don’t forget, Alan Greenspan blew the biggest bubble in our lifetimes by pushing rates down to 1%. Helicopter Ben’s gone 1% further than 1%.

Some fresh-air comments from Dallas Fed President Richard Fisher, from a speech today. Expect him to pick up Hoenig’s banner of dissent. Newswires’ Mike Derby reports:

The official said none of his business contacts “are complaining about the cost of borrowing, the lack of liquidity or the availability of capital.”

Instead, “all express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.” He added “all are stymied by a Congress and an executive branch that have appeared to them to be unaware of, if not outright opposed to, what fires the entrepreneurial spirit.”

Derby notes that Fisher “hit back” at the widespread criticism the Fed has gotten in Congress. “Those lawmakers who advocate ‘Ending the Fed’ might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.” Fisher said “the Fed could not monetize the debt if the debt were not being created by Congress in the first place.”

Well said, Mr. Fisher.

The legal construct known as the national debt ceiling is one of the biggest fictions in Washington, a place that surrounds itself in more stories than City Lights. The debt ceiling is a set limit to the national debt, beyond which Congress cannot borrow.

Sounds pretty scary, right?

It’s not. Every time the national debt starts creeping up toward the “limit,” Congress passes some resolution that increases the limit. That increased limit is inevitably and eventually reached, of course, forcing Congress to “act” again (if by the word “act,” you actually mean taking no action, but instead giving yourself another free pass to profligate away.)

So once again, the national debt is approaching the debt ceiling, currently standing at $14.3 trillion, and the game is starting up again. What makes it different this time, though, is the new GOP-led House in Congress, which at least talks a big game on deficits. They will get a chance, very soon, to prove they’re more than talk. Will they just do like past Congresses, and raise the limit? Or will they use this as a “teaching moment,” an opportunity to put their rhetoric into practice?

The Treasury Secretary, Tim Geithner, wrote a letter to Congress, imploring it to raise the limit. The irony of the what is essentially the nation’s chief financial officer begging the board of directors to be less fiscally responsible, there’s a slightly more anxious tone to this year’s letter than there was to last August’s letter.

What’s got the Treasury Secretary so worried is that if the ceiling isn’t raised, Congress legally won’t be able to borrow any more money. That would raise the prospects that the U.S. government would default.

Given how the feds have been issuing a lot of short-term debt in the past few years to take advantage of the low interest rates, I wonder how real the prospect is this time around.

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Good year in 2010 for US stocks, not such good one for Byron Wien’s list of “top ten surprises.” As a strategist, and now Blackstone vice chair, He’s been doing this a long time. Doesn’t mean he’s getting any better at it, though.

By our count, he was completely wrong on eight of his predictions, mostly wrong on his No. 1 (GDP would grow at 5% real rate, unemployment would drop below 9%; S&P 500 operating earnings would come in above $80 — that looks safe.)

Big swing and a miss on the following:

- Fed would raise interest rates, with Fed funds rate at 2% by year end. We’ll be lucky if that one happens by 2012.

- Yield on 10-yr note would go to 5.5%. See above. Equally fanciful.

- S&P rallies to 1300, then falls below 1000 and ends year at 1115. Nice try. Not even close.

- Dollar rallies vs yen and euro, with EUR/USD dropping below $1.30. Briefly correct on that one, but didn’t last.

- Congress would pass bills providing loans and subsidies for new nuclear power plants. Didn’t happen.

- Democrats would only lose 20 House seats in November. Whoops.

- Civil unrest reaches crescendo in Iran, Ahmadinejad gets pushed out. Also didn’t happen.

- Japan’s Nikkei 225 rises above 12000. Not quite. Continue reading…

You know what, I’ll be as happy as the next guy to see my paycheck get bumped up a bit next year, both because my taxes won’t be rising, and the reduction in the FICA tax. I’ll finally be able to complete my collection of racoon-proof garbage cans, and I can easily afford that new ice scraper for my car, and maybe I’ll buy a few Beatles songs at the iTunes store. Hell, I might even buy a new winter coat. The wife says my current one makes me look like the Unibomber.

But, I mean, come on! $860 billion? $860 billion?!

That’s what the Obama-GOP tax-cut deal is going to cost the US government over the next decade. Does that strike anybody else as, well, insane? Especially considering the bill effectively covers a two-year period? How’s that math work? You know what all those Congressmen and Congresswomen and the President should do with their savings? But some dictionaries. Turn to the first section, “A,” and look up “austerity.” It comes after “asinine.”

For two years, all we’ve heard out of Washington, and the GOP especially but even from the White House, has been this canard about how the government needs to straighten out its finances. Looming fiscal train wreck I believe is a phrase I’ve heard bandied about.

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David Stockman, former OMB director under Ronald Reagan, had some spirited comments on the Fed’s QE2 gambit during a Bloomberg TV interview yesterday, well worth a watch. He finishes with a flourish by saying the central bank is “injecting high-grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient.”

Hat tip to Art Cashin’s daily morning comment for heads up on the Stockman interview.

This isn’t the time for a divided government, and I don’t necessarily mean Democrats controlling one branch and Republicans another. I mean this isn’t the time to have the two parties that ostensibly run this nation squabbling like a bunch of children out in the schoolyard, while the school’s on fire. But it seems like that’s what we’re gonna get.

While the GOP is pretty clearly going to take the House, creating the much ballyhooed gridlock, the Senate seems a long shot. The conventional wisdom on Wall Street is that this is a good thing; if Washington is locked in its own box, it can’t get in the way of private enterprise. But, as Miller Tabak’s chief economic strategist Dan Greenhaus pointed out to me a little while ago, “gridlock” is a benefit for the stock market and businesses in a fully functioning economy. Needless to say, that is something we do not have right now.

Further complicating matters: Greenhaus says he went back 100 years, and couldn’t find a single example of a situation where the President had a split Congress. Usually, he said, both houses turn together. What this could mean, obviously all the returns aren’t in yet, is that Obama may have less to fear from Congress than, say, Bill Clinton did in 1994, since nothing that comes out of the House will get past the Senate, Greenhaus said. So this idea that Obama may have to tack to the center just may not come to fruition this time around.

“These guys can’t come close to repealing healthcare,” Greenhaus said of the tea partiers, “but they’re gonna give it a try.” So the GOP, out of some ideological zeal, is going to waste as much time trying to repeal the healthcare bill as the Obama administration did trying to get it passed. Meanwhile, precious time will be wasted (remember, this is not a fully functioning economy.)

And all the big questions and problems, tax cuts, financial reform, government spending, won’t be solved with a hopelessly divided government, he said.

He pegged the over/under on GOP advances in the House at 50; less than that would rob the Republicans of a clear victory, and a larger mandate. But more than how many seats change hands, he said, is how the divergent views of the new Republican Congressmen play out. The rowdy tea partiers who are making the big splash tonight may not hold much sway with the GOP leadership. Their policies sound good, he said, but they don’t poll so well. That dynamic will be more important that how many seats are won or lost tonight, Greenhaus said.

We’re not tough enough to take the pain.

That’s why it’s come down to this, citizens — the Fed priming more QE, doing “whatever it takes” to alleviate the hardship. The ceaseless efforts to artificially prop up asset prices. The extraordinary amount of Americans’ monthly personal income now derived directly from Uncle Sam.

It should be much more expedient and ultimately less costly for the government to simply step back and let the economic chips fall where they may. But it’ll hurt, and the nation’s leadership doesn’t think we citizens can handle the sting.

Indeed, we often come across like a society of coddled whiners who can’t stand to even be the slightest bit inconvenienced, never mind subjected to any degree of physical or psychological travail. We can’t handle bad reception on our iPhones, why should the government expect us to deal with the hardship that would come with allowing home prices to reach their natural level, to finally unleash market-clearing prices and probably the failure of more big banks and other institutions? Continue reading…