A year ago at this time, as 'green shoots' sprouted the discussion was when the Federal Reserve would withdraw emergency policies and begin to do things such as expunge some of the massive inventory of mortgage bonds it had bought during QE1. Of course despite the 'recovery', and a few trillion thrown at the economy via fiscal and monetary means we never reached that point. Indeed, the only major setback in the stock market's relentless rally from March 2009, was a period post April 2010 when the Fed stopped buying bonds under QE1 and before they began recycling maturing debt back into new purchases during QE1.5 in late summer. That was the only time the economy and market seemed to be acting in a somewhat organic way and both weakened in a material way.
Of course you know the story since QE2 - the David Tepper world of we can't lose and a globally backstopped system of moral hazard run amok. [Sep 24, 2010: [Video] Appaloosa David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment] Even though in theory we are in a wonderful recovery. With a new fiscal stimulus finalized earlier this month to mirror the $800B version in early 09, this will be close to $2 trillion of debt financed stimulus in the period of 2009-12, and that only includes the 2 major Congressional blockbuster packages. We are not discussing the multitude of homeowner backstop / bailouts, cash for clunkers, cash for appliances (did you forget that one already?), the surge in unemployment benefits, the usage of food stamps in the country from 1 in 11 Americans to 1 in 7, the self created stimulus of many Americans defaulting on their mortgage but still living in the house (7M households), etc. [Nov 5, 2010: USA Today - Anti Poverty Programs Surpass Cost of Medicare in US] I could go on but the list could fill an entire blog.
The larger comment is, we are in a steroid filled economy when in a typical economic recovery we should be rip roaring at 4-5%+ GDP growth from ORGANIC means. Indeed after such deep recessions as we suffered, we should have had multiple quarters of 5-6%+. Instead, we are struggling to maintain 2-3% GDP with completely SYNTHETIC means. We are celebrating the chance of 3-3.5% GDP in 2011 - ignoring the reasons of how it is being achieved. This is not how a 'recovery' should be proceeding - many quarters after the recession 'ended' the Fed is continuing emergency policies and indeed the debate has begun whether a new round of said policies will begin next summer. Our fiscal policy likewise is similar to what we did in the depths of the Great Recession. With all the 'recovery' going on, why are we putting additional programs in with similar price tags?
I concluded long ago the country (and globe) is going through structural adjustments, and the outcome of these changes for many in Americans will be dour - especially in the lower to middle tranches of the economic food chain. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] We have evolved to a 3 tier system - the top 20%, the public + pseudo government (healthcare, education) worker, and everyone else. [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy] I am beginning to read more and more news outlets, and 'experts' come around to these views. Now again, you might wonder with all the happiness (indeed giddiness) of late on the prospects of 2011, how this fits? After all the stock market is up, and we all become rich by yet another Fed induced gaming scheme (it worked so well in 1999 NASDAQ and 2004-2006 housing, what could go wrong this time around!?) - although clearly any wealth effects will be concentrated mostly in the top tranches of society. [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses] We won't even discuss the long run costs of what creating a transitory Fed induced wealth effect does to the real economy (think crashes in stocks 2000-2002 and housing 2007-2010+). Just remember to clap and worship the Bernank.
It is quite clear - we are buying 'growth' with our steroids. I'll gladly pay you Tuesday for a hamburger today. If we want to inject $2 Trillion into a $14 Trillion economy each year (a 14% steroid injection), we can create a synthetic high and mask reality. (or in our favorite terms, kick the can) Indeed, we saw earlier this week that net liabilities rose $2 trillion in 2010.
- The U.S. government fell deeper into the red in fiscal 2010 with net liabilities swelling more than $2 trillion as commitments on government debt and federal benefits rose, a U.S. Treasury report showed on Tuesday.
- The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government's liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier. The biggest increase in net liabilities in fiscal 2010 stemmed from a $1.477 trillion increase in federal debt repayment and interest obligations.
- Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.
You don't want to know what happens in accrual type accounting if the interest rates on our long term Treasuries begin to spike. We continue to benefit from historically low rates, and hence our obligations - as fast as they are rising - are not showing the true potential of what very likely is headed our way. It is just impossible to know when.
But in Wall Street terms: who cares? We live for today, and tomorrow is another issue. Anything out past a week is too long term to care about. Indeed I saw a gentlemen on Mr. Kudlow's show last evening who literally said this - he wants QE3, QE4, and QE5 - he only cares about making money, at any cost. He was giddy about 2011 and said he'll worry about 2012 when it gets here. Anyone who disagrees with this thesis needs to understand this appears to be the prevailing thought on 'the Street'. I only assume these people do not have children because apparently long term consequences for heirs means nothing as long as bonus check comes in next year.
I know from emails and comments on the site many readers don't share such a view, and wish to balance the long term with the near term. So for those of you, I wanted to point out a fantastic read on many of the structural issues we've discussed ad nausem in a special report Reuters has out: Is America the Sick Man of the Globe? (click here to go there) While the topics are very familiar to readers of FMMF, if you are newer to the site - this is an excellent overview of the challenges we face as a nation and why both our federal government and central bank are forced to continue to take actions consistent with a deep recession, even as we celebrate the statistical recovery and glowing prospects of 2011 .<---bought and paid for by the grandchildren
Outside of that, we'll return to your normally scheduled melt up - although early this morning we seem to have a malfunction. I see a disaster scenario playing out as the S&P 500 is down 0.1%. This must be the 'dip' they were talking about... buy buy buy.