I read with interest Joe Weisenthal’s comments about Barry Ritholtz’s Big Picture Conference yesterday. Apparently many of the speakers and attendees expressed their “scepticism” about the market and a “pervasive belief that it is being held together by the Fed”. Joe’s summaries of a couple of conference speakers caught my attention:
- Barry Ritholtz explained that this is the hardest market environment he has ever seen because of the cross signals sent by the economy and the Fed.
- Jim Bianco feels that the market is falling because Romney’s chances are increasing and therefore that increases the chance of a more hawkish Fed Chairman.
As both of these comments relate to Fed policy and its future direction, I feel compelled to comment because both of these speakers appear to be living in a monetary policy vacuum and are suffering from a severe case of Bernanke monetary policy myopia. That is understandable because in the absence of any meaningful progrowth fiscal policy for the past three and half years, Chairman Bernanke has been the last policy man left standing. In fact a growing economy is driven by an effective combination and balance between monetary and fiscal policy. We have had neither. I believe that the economy is languishing at stall speed because essentially any acceleration of monetary policy has been sterilized by decelerating fiscal policy. Not an optimal combo as far as future growth is concerned.
Investors, pundits, economists, market strategists and CNBC talking heads have grown used to talking and hearing only one side of the important policy debate…the monetary side. Will there be more QE?..won’t there? If so when? What about ZIRP? What about the Twist? The airwaves are dominated by discussions and debates about what the Fed is going to do. Lost in din is any meaningful discussion and more importantly, implemetation of progrowth fiscal policy. The end result…below trend growth. Mssr’s Ritholtz and Bianco appear caught in this monetary focus trap
This will all change with a Romney Presidency. Expect early in his term for steps to be taken to encourage more growth and jobs through a more proactive fiscal policy that includes tax reform, deregulation, targeted spending cuts, a new domestic energy policy and the removal of the growth stifling uncertainty catalyzed by new time released government controlled health care mandates and “new taxes” (the Supreme Courts words not mine).
Most importantly…we will get away from this ‘monetary policy last man standing” concept. In fact, I disagree with Jim Bianco’s conclusion that Romney is increasing volatility because he won’t reappoint Bernanke when his term comes up in January 2014. I would argue that because we can expect the economy to respond positively to Romney’s progrowth fiscal policy that we will in fact require a more hawkish Fed at lot sooner than the consensus, and even the Fed, believes. In other words, to resurrect the economy, we won’t be relying on a lopsided monetary policy pedal taking us in economic circles because Bernanke can apply the brakes as progrowth fiscal policy kicks in. And that will be a good thing. The question remains…since monetary policy works with a 6 to 8 month lag…and in order to be reappointed by the President Romney…will Bernanke be prepared to proactively make the appropriate tightening policy shift? His future is in his hands…not Romney’s.
So to Barry Ritholtz I say…cheer up! With a Romney Presidency, economic and by extension market uncertainty will clear up as the traditional economic cycle will return when we have better balance between monetary and fiscal policy.The economy will return to trend growth or better and the stock market will applaud it.
And to Jim Bianco? Don’t be afraid of a more hawkish Fed…with a Romney Presidency you will learn to embrace it!
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