Prospects for the Fed, the Presidential Election, and the Dollar

The jobs report released on Friday was not good.  Furthermore, when one examined the decline in the unemployment rate to 8.2 percent, one saw that the rate fell, not because the labor market was getting stronger, but because the number of people actively seeking jobs declined.  That is, the labor market shrunk…under-employment rose. 

Immediately, speculation grew about whether or not the Federal Reserve would go in for another round of monetary easing.

This discussion closely follows upon the conclusions that the Fed would not engage in any more quantitative easing following the recent meeting of the board of governors of the Federal Reserve System and countless speeches and lectures from the Fed Chairman. (http://seekingalpha.com/article/467561-ben-bernanke-please-understand-me)

It is my view that the Fed will not engage in another round of monetary easing in the near future unless the economy or the banking system or the international financial system experiences a major shock.  A “not-so-good” report on the labor market will not be the trigger for such an injection.

The economy is growing, although it is not a very setting the world on fire. (http://seekingalpha.com/article/469671-gdp-growth-the-road-ahead-and-the-investment-climate)

The banking system is quiet and although commercial banks continue to disappear either through acquisition or FDIC closure, things seem to be peaceful with no expected surprises here.

Deleveraging in the private sector continues and restructuring continues to take place in housing, state and local government and the labor markets.  Again, there are no expected surprises in these areas.

And, it is a presidential election year.  It is highly unlikely that the Federal Reserve will engage in any actions that will leave it exposed to the criticism that it is playing politics.  In reality, Mr. Bernanke and the Fed has done about all it can to create a favorable economic climate in which President Obama can get re-elected. 

Given the lag-in-effect of monetary policy, there is very little that the Federal Reserve can do at this time to change the trajectory of the real economy before the election takes place in November. 

Therefore, I expect that the Federal Reserve will conduct a very benign monetary policy over the next six- to nine-months. (http://seekingalpha.com/article/472291-the-federal-reserve-was-quiet-in-q1-but-stands-ready-to-do-more) Otherwise, it will open itself…even more…to charges that it is playing politics and supporting the incumbent president.

Of course, the Fed cannot stand by if there is a crisis somewhere in the economy…in the banking sector…or in the financial markets…or somewhere else.  In such a case, the Fed will respond quickly and with sufficient force to avoid any breakdown.

Otherwise, I believe that the Fed will avoid any new initiatives this year.  Short-term interest rates will remain low.  The demand for money is weak and the Federal Reserve statistics indicate that there have been no new actions on the part of the Fed to keep them at current levels. 

If the real economy does pick up some speed and the demand for money begins to increase, some pressure may start to build for these short-term interest rates to rise.  My guess here is that if this scenario starts to develop, the Fed will allow these short-term rates to creep up.  In such a case, the Fed will not engage in a real active campaign to keep them in their current range. 

The key here is that the pressure for rates to rise will come from an economy that is strengthening.  This movement will be looked on positively by Federal Reserve officials.

The interesting market reaction to the Fed’s indication that it would not engage in another round of quantitative easing was that the dollar began to strengthen against the euro.  Through Thursday, last week, the dollar price of the euro had almost reached $1.30. 

Friday, with the release of the jobs report and the speculation that the Fed might engage in another round of quantitative easy, the dollar price of the euro rose slightly. 

This morning, the dollar rose again against the euro and I believe that this will continue if the Fed continues to maintain its current monetary policy stance through the spring and summer of this year.  In fact, I believe that the dollar will crack the $1.30 price against the euro and will continue down as the European Central Bank (ECB) continues to follow its present policy position.  (For more on this see my earlier post about the dollar breaking the $1.30 price level earlier this year: http://seekingalpha.com/article/371691-the-euro-drops-below-1-30.)

The dollar will continue to appreciate against the euro if the Fed continues to keep things pretty much the way they are at the present time because Europe, in my mind, is still in the middle of a mess.  One only needs to mention what is going on in Spain and Italy and Portugal...and then there are the French elections that we must go through over the next couple of months.

So, I see the Fed remaining relatively quiet for a while (except for Mr. Bernanke’s efforts to inform the world on what he and the Fed have done over the past five years or so); I see the economy continuing its recovery; I see some pressure starting to build on short-term interest rates; I see the value of the dollar rising against the euro; and I continue to hope for the absence of any unfavorable shocks to the world. 

If we can achieve this over the next year I believe that we will have been very fortunate.     

No Enthusiasm for Mergers in Q1: Is Coty Bid for Avon a First to "Jump in the Pond" to Get Things Going?

Mase: Economics and Finance.  April 2, 2012

No Enthusiasm for Mergers in Q1: Is Coty Bid for Avon First to “Jump into the Pond” to Get Things Going?

Enthusiasm for mergers or acquisitions in the first quarter of 2012 was low as CEO confidence for doing deals seemed to be missing.

Corporations are still sitting on “tons” of cash and longer-term interest rates, across the board, remain exceedingly low and funds are available.  Yet global M&A activity in the first quarter of 2012 was at the lowest level since the first quarter of 2003. (http://professional.wsj.com/article/SB10001424052702303404704577311683850080836.html?mod=ITP_moneyandinvesting_4&mg=reno64-sec-wsj)

The biggest concern in the executive suite seems to be that old demon “uncertainty.”  There is uncertainty about the economy; there is uncertainty about where President Obama stands on business; there is uncertainty about events in Europe and the world; and there is uncertainty about the regulatory and legal environment.

This “uncertainty” is one of the contributing factors to fact that there is not more robust economic growth. (See my post, http://seekingalpha.com/article/469671-gdp-growth-the-road-ahead-and-the-investment-climate.) For people to commit, people must have confidence that what they are doing has a good chance of succeeding.

Attitudes seem to be modifying a little.  If anything, as someone has described it, there is a general lack of bad news. 

Not too encouraging…but, this can be alright too.

The economy is growing, there are some encouraging signs, here and there, and, although there are still major things to watch out for, people do not seem to be expecting major shocks to the system.   Monetary policy is relatively benign at the present time and is expected to remain so through the fall election.  But, the monetary authorities are prepared to respond strongly against any major shock to the economy if such a shock occurs. (http://seekingalpha.com/article/472291-the-federal-reserve-was-quiet-in-q1-but-stands-ready-to-do-more.)

Within this environment, more and more discussions about acquisitions seem to be taking place between organizations.  Ideas and plans that had been put on the shelf seem to be back in people’s minds again. 

Especial interest seems to be focusing, not surprisingly, on Europe.  The financial crisis of the last few years has drained the continent in many ways and there seem to be quite a few potential targets available at rather good prices. 

Along this line, just recently the UK’s NDS Group Ltd. was picked up by Cisco Systems, Inc., and the Netherland’s TNT Express NV was acquired by United Parcel Service, Inc.

Starting out a new quarter, following a quarter that saw strong stock performances, we hear that Coty, Inc. of Europe is making a bid for Avon Products, Inc., even though Avon is more than twice the size of Coty.

The importance of this is not so much the deal, itself, but the fact that action in this area seems to be increasing.  The economy is growing, monetary policy is permissive, cash is available, the stock market has been strong recently, and it is spring!

“The main thing to really resolve is the absence of confidence, so you need a couple of people to jump into the bath and say the water isn’t so bad in here.”  This is from Daniel Wolf, a partner in the law firm of Kirkland & Ellis.

Basically, some people have to be brave enough to take the plunge!  Then others may follow.

A pick up in M&A activity may not cause economic growth to increase…in fact, I don’t believe that it will…but it may help to spread more confidence around which will lead people to buy more common stock or pay off more debt.  Each of these things will help to confidence to grow and expand…both of which are necessary for the economy to continue on its upward path. 

I would expect this to be particularly helpful in causing the price of stocks to rise.  The reason for this is that historically, a good time to buy common stocks is when people and businesses are cautious and exhibiting a disciplined approach to what they are doing.  It is a good time to acquire when people and businesses are being very selective. 

Generally, this means that prices are low and attractive acquisitions can be made.  It also means that not everyone is jumping into the pool so that the level of the entire pool is rising.  That is, that people and businesses are just buying things without any real reason except that things seem to be going up. 

Let’s keep our eyes on those corporate cash hoards to see whether or not companies are moving more aggressively into acquisition mode.  My belief is that if the pace of M&A activity picks up, this will be a show of confidence that will benefit us all.   

Ryan's Republican Budget Plan

Representative Paul Ryan has produced another picture of what it would take to get the government budget under control and bring down the soaring fiscal deficits now being experienced. 

In October 2011, the gross public debt of the United States government was in excess of $15 trillion.  Over the past two years or so, I have been arguing that there is a very good chance that in the next ten years the debt outstanding will double. 

President Obama has produced his outline for a new budget trajectory with debt increasing by only about $6.5 trillion over the next ten fiscal years.  However, I have absolutely no confidence in the ability of Mr. Obama to lead in this area and so I would argue that this proposal is DOA.

The growing body of literature on the economic leadership of the Obama administration is unanimous about the failures embodied within this organization.  Here I reference the book by Ronald Suskind, “Confidence Men,” the recent book by Noam Scheiber, “The Escape Artists,” and the Washing Post report about the negotiations between Obama and the House Republicans over the “big picture” deal-making last year that collapsed when House Speaker John Boehner told the President “We don’t have time to reopen these negotiations.”

The liberal writer John Chait in New York Magazine expanded upon this latter story: “How Obama Tried to Sell Out Liberalism in 2011.” (http://nymag.com/daily/intel/2012/03/how-obama-tried-to-sell-out-liberalism-in-2011.html)

Perhaps the most damning comment on the process of conducting economic policy in the Obama administration is the one attributed to Larry Summers, who repeatedly told Peter Orszag, director of OMB that, “with Obama as President, ‘we are home alone.’” (See Suskind’s book.)

The Obama proposal cannot really be considered to be credible.

One could argue that the Republican budget put forward by Representative Ryan may never be put into effect but it adds one thing to the discussion that is very helpful.  It is a credible effort to state what needs to be done to bring the federal budget under control. 

You may not agree with all of the choices included within the document, but Ryan does present us with a picture of the extent things need to be brought into order.

Does it promise a balanced budget?

Yes, but not until 2040.

But, we were close to a balanced budget in the late 1990s…what happened?

Well, I think if you seriously examine the budget situation you see how seriously we have gotten out-of-control over the past ten years or so.  The discipline and effort that must be forthcoming to even think about balancing the budget in 2040 shows how far events have gotten away from us.

Robert Mundell, Nobel Prize winning economist from Columbia University, was interviewed on Bloomberg Radio the other day.  Mundell, in his provocative way, stated that “The public is looking for free lunches and the political competition for votes makes the politicians off them free lunches.”  He added, “That’s what gets us in to the difficulties of insolvency.”

Well, lots of free lunches have been purchased by the federal government in recent years.  The problem is, how do you take “free lunches” away from the electorate once they have been given to the voters?

Mundell continued, “You could have fiscal stimulus back in the days of (John Maynard) Keynes, when the government was a small proportion of gross domestic product and there was no insolvency problem.”  Today, you just don’t have the space to create more debt, issue more bonds to pay for the deficits, and expect everything to work out well.

Representative Ryan gives us a credible place to start.  And, given that presidential candidate Mitt Romney has bought on to the plan, we will be hearing a lot more about Ryan’s plan in the future. 

If you don’t like Ryan’s plan…that is OK.  Tell me how you would arrange things…let me see how you would work things out. 

I don’t believe the United States economy can be all that it can be in the next ten years if the federal government adds another $15 trillion to the gross public debt.  I don’t believe that the economy can be that vibrant if we even add $6.4 trillion to the debt as President Obama has proposed.

What’s your plan.  Let’s talk seriously about it.  I believe that Representative Ryan has done us a service by presenting his plan for all of us to see.  Let’s respond!