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Mitt Romney
has just rolled up back to back victories in the Nevada and Florida
primaries, and his path to the Republican nomination looks to be inevitable.
Republicans are mostly basing their voting decisions upon opinion polls
showing Romney has the best chance of defeating President Barack Obama in the
Nov 6th presidential election. According to the latest Gallup poll, both
Obama and Romney have equal support of 48% of the US-electorate, and if
correct, more than a billion dollars worth of
campaign and PAC ads will swamp the media outlets, in order to try an
influence the decisions of less than 5% of undecided voters.
In his
standard stump speech Romney charges Obama with peddling for votes by
spending taxpayer dollars in order to support his re-election. "Over the
past three years Barack Obama has been replacing our merit-based society with
an entitlement society," Romney tells his supporters. Indeed, direct
government payments to individuals shot up by almost $600-billion, a +32%
increase, since the start of the Obama administration in 2009.
A record 49%
of Americans live in a household where someone receives at least one type of
government subsidy, such as Medicare, food stamps, hosing
subsidies, unemployment insurance, school lunch, veterans' benefits, etc. And
63% of all federal spending this year will consist of checks written to
individuals for which the government receives
nothing in return, the White House estimates. That's up from 46% in 1975 and
18% in 1940. At the same time, about half of Americans pay no federal income
tax at all. While the Republicans rail against the burgeoning welfare
society, they also support corporate welfare for the oil industry, and tens
of billions in subsidies for America's Agricultural farm factories.
Americans are
facing tough times. Millions are still out of work. Wages remain stagnant,
while health care costs, tuition, and other household cost continue to rise.
Many homeowners owe more for their houses than they are worth. Yet the income
of the wealthiest 1% of Americans has risen dramatically over the last
decade, and now equal 25% of the entire national income. Still, the federal
government lavishes the top-1% with billions of dollars in giveaways and tax
breaks. Meanwhile 50% of US-workers earned less than $26,364 last year,
reflecting a growing income gap between America's rich and poor.
Undoubtedly,
there will be plenty of mudslinging fired from both sides, with political
spin artists trying to brainwash the public's view of the state of the
economy. "This president's misguided policies have made these tough
times last longer," Romney said to his Nevada supporters on Feb 5th.
"If elected president, my priority will be worrying about your job, not
saving my own," he added. For his part, Obama told the Democratic Caucus
on January 27th that their votes for the $787-billion economic stimulus
package prevented a second Great Depression, and enabled the progress made
since the financial crisis of 2008 and 2009. "Over the last 22-months
we've seen 3-million jobs created, - and more new factory jobs since the
1990's. A lot of that is because of tough decisions you took," said
Obama.
Mitt Romney
is now starting to aim most of his fire on President Obama, instead of
attacking his Republican rivals. However, Romney's Road to the White House
faces a very big roadblock, - the Federal Reserve. The highly secretive central
bank is working around the clock in order to help Mr
Obama get re-elected, and the fruits of its labor are just beginning to
sprout in the political arena. The Fed has engineered an improbable recovery
rally in the stock market that has lifted the Dow Jones Industrials to its
highest closing level since May 2008, - back to the time before Lehman
Brothers collapsed. The Nasdaq, dominated by
technology stocks, has rebounded to the 2905-level, its highest close in
11-years, led by juggernaut Apple Inc.
Despite all
of the turmoil in the stock markets over the past five-years, when retail
investors withdrew $465-billion of their savings out of stock mutual funds,Fed chief Ben
"Bubbles" Bernanke proved that the Fed could rig the stock market,
- and engineer an economic recovery by printing vast quantities of money, and
keeping interest rates locked at historically low levels. Behind the scenes,
the Fed funneled trillions in loans to Wall Street bankers, arranged currency
swaps with other central banks, and through in agents, intervened directly in
the futures markets, in order to keep the stock market's recovery rally
intact.
One of the
Fed's favorite tools used to pump-up the stock market is "open
mouth" operations, in order to influence trader behavior and market
psychology. The Fed broadcasts a constant barrage of hints to the financial
media, that it could unleash another tsunami of "quantitative
easing" (QE), at a moments' notice. By flooding the markets with
ultra-cheap liquidity, the Fed whets the appetite of risk takers, and starts
an orgy of speculation in the markets and creates asset bubbles. In turn, a
steadily rising stock market is boosting the odds of Obama's winning a second
term. Mirroring the steady climb of the Dow Jones Industrials, online bettors
at Inntrade.com, now give Obama a 57% chance of getting re-elected.
That's up
from 46.5% odds of winning on October 4th, when the Dow was plunging in a
downward spiral to the 10,500-level. Thanks to massive intervention in the
futures market, the Fed put a brutal squeeze on short sellers, and engineered
a stunning +375-point rally in the Dow Industrials in the final 45-minutes of
trading on October 4th. The Fed turned back the threat of a Bear market, and
in hindsight, ignited the third leg up for the Bull market that began in
March 2009. The Fed has proved its ability to manhandle the Treasury bond and
stock markets, and few traders are willing to fight the Bernanke Fed these
days.
Incumbent
presidents are always hard to beat. The powers of the presidency go a long
way. Not since 1971 and early in the 1972 election year, when Nixon pressured
Arthur Burns, then the Fed chairman, to expand the money supply with the aim
of reducing unemployment, and boosting the economy in order to insure Nixon's
re-election, have traders seen such massive political pressure on the Fed to
intervene in the markets in order to help a president to get re-elected. In
order to constrain an outbreak of inflation, Nixon imposed wage and price
controls, and won the election in a landslide.
Underneath
the surface, the Fed was steadily increasing the high octane MZM Money
supply, throughout the turbulent days of 2011. The size of the MZM Money
supply has increased by $1-trillion from a year ago, to a record
$10.75-trillion today. At the same time, Bernanke has gone far beyond the
markets wildest imaginations, by pledging to keep borrowing costs for banks
and hedge funds locked at zero-percent for the next three years. The Fed said
that it aims to continue with its ultra-easy money policy until the
US-jobless rate falls towards 6-percent from 8.3% today, and is willing to
tolerate a higher inflation rate.
Only one
US-president since World War II -- Ronald Reagan -- has been re-elected with
a jobless rate above 6-percent. Reagan won a second term in 1984 with an
unemployment rate of 7.2% on Election Day. Reagan won in a landslide since
the jobless rate had fallen almost 3% in the previous 18-months, and a
sizeable majority of US-voters thought the economy was moving in the right
direction. By contrast, under Mr Obama the
unemployment rate has dropped by 1.7% in the last 26 months - from a high of
10% in 2009. The Fed aims to keep the ultra-easy conditions in place that
would enable the jobless rate to tumble to 7% by Election Day, even at the
expense of faster inflation, to help Obama win a second term.
It's starting
to look as if the US-economy is on a steady, if unspectacular, upward trend.
Considering how beaten down the economy has been, - it's possible that Obama
might find himself in the sweet spot of a virtuous cycle of a business
recovery, in the months ahead. Republicans will claim that Obama's policies
deserve none of the credit. "Mr. President, we welcome any good news on
the jobs front," Romney said. "But it is thanks to the innovation
of the America people and the private sector and not to you, Mr.
President," he added.
However,
presidents tend to get the blame for everything bad that happens on their
watch and receive credit for everything good. Obama's chances for re-election
are starting to look much better, after Labor department apparatchiks
reported that US-employers added 243,000 workers to their payrolls in January,
the biggest gain in nine months. The US-economy has created about a
half-million jobs in the past two months, government bureaucrats says, and
the unemployment rate dropped to 8.3% in January from 8.5% in December.
Already, 2012 is looking like a winner for automakers -- just one month into
the year.
Another
hopeful sign for the US-economy's future, - sales of new cars and trucks rose
+11% to in January to 913,287, thanks to low borrowing costs and better loan
availability. The sales pace accelerated to its highest level since the Cash
for Clunkers program in August 2009. Chrysler had its best January in four
years. If sales stay at January's pace, they would reach 14.2-million, up
from 12.8-million in 2011. While that's below the 2000 peak of 17.3-million,
it's better than the 10.4-million trough hit in
2009. One reason car sales are improving is that buyers need to replace aging
vehicles. The average age of a vehicle in the US is a record 10.8-years, nearly two years older than a decade ago. The
bad news is that US-motorists are paying an average $31,300 for a new car,
compared with $28,000 five years ago,
Historical
observation reveals that the direction of the stock market has a notable
influence over consumer confidence and spending levels. In particular, the
top-20% of wealthiest Americans account for 40% of the spending in the
US-economy, so the Fed hopes that by inflating the value of the stock market,
wealthier Americans would decide to spend more. It's the Fed's version of
"trickle down" economics, otherwise known as the "wealth
effect."
Yet when
measured in "hard money" terms, or in comparison to the price of
Gold, it becomes clear that much of the Dow's "miracle rally"
during the Obama administration was nothing more than a "monetary
illusion," inflated by the Fed's hallucinogenic QE scheme. When seen
thru the prism of Gold, 1-share of the Dow Industrials can only buy
7.4-ounces of Gold today. That's slightly less than the exchange rate that prevailed
at the bottom of the stock market's slide in March 2009. Compared to the
price of Gold, the Dow Jones Industrials is currently trading at its lowest
level since 1992, - a 20-year low. In other words, without the Fed's massive
money printing operations, the stock market would be in a shambles today, and
Obama's chances at re-election would've been worse than Jimmy Carter's in
late 1980.
Just as the
Dow's historic rally is a mirage in hard money terms, the decline in the
jobless rate to 8.3% is also deceptive. The fall in the headline unemployment
rate has tumbled because the size of America's workforce is shrinking -
4.8-million workers have simply given-up looking for a job over the past
31-months, and are no longer counted as unemployed. If these workers were
counted as unemployed, the jobless rate would be at 11%. Nearly 24-million
Americans remain unemployed, underemployed, or have just stopped looking for
work. Long-term unemployment remains at record levels. If all these segments
of the labor force are considered, the so-called U-6 jobless rate is at
15.1%, or equal to 1-in-6 American workers.
There's also
the issue of the purchasing power of US-wages. The average hourly earnings
for private-sector US-employees for the past 12 months rose by a scant
+1.9-percent. That's well below the +3% rise in the consumer price index,
resulting in a further lowering of workers' real wages. There's also been a
widening disparity between corporate profits and worker's wages. InQ'3 of
2011, US workers received just 44-cents in wages of every dollar of income
earned in the US, the smallest share since 1947. In other words, whatever
economic growth that's been achieved over the past few years has also come at
the expense of a sharply higher cost of living for many commodities and
services. In contrast, US-corporations received more than 10-cents, up from
7.3-cents per dollar of income five years ago when the recession officially
began, an increase of +37%, benefitting the top-10% of the wealthiest
Americans that control 80% of the listed shares on Nasdaq
and the NYSE.
Still, the
Fed figures that if it continues to pump-up the value of the stock market,
eventually good tidings for the US's asset based economy would follow. On
Sept 21st, 2011, the Fed devised a brand new scheme to inflate the stock
market's value. The Fed said it would switch $400-billion of its portfolio
into long-term Treasury bonds, in order to lock down long-term interest rates
at historic low levels. The Fed telegraphed the move to Wall Street for
weeks, dubbed "Operation Twist." Since then, the Fed has locked the
10-year Treasury note yield below 2%, which is less than the 2.05% dividend
yield that's offered by the S&P-500 Index, and making the stock market
look more attractive.
The Fed has
been able to lock long-term bond yields at historic lows, even at a time,
when the CBO reports that annual spending over the Obama era has climbed to a
projected $3.6-trillion this fiscal year from $3-trillion in fiscal 2008, up
more than 20%. The government's share of spending in the US-economy has
increased to 24%, up from an average of about 20% of GDP. This doesn't
include the $2-trillion tab for Obama Care. Under the Obama administration,
the federal debt has mushroomed by about $5-trillion in a mere four years.
Since the Fed
unveiled "Operation Twist," the Dow Jones Industrials has soared
+1,700-points higher, yet long-term Treasury yields remain
"repressed" by the central bank. Typically, in a free and open
marketplace, Treasury bond yields would've climbed sharply higher, alongside
a booming stock market. Instead, the Fed has kept Treasury yields locked at
artificially low levels. The massive degree of heavy handed intervention in
the marketplace, and the manipulation of interest rates, the stock market,
and currency exchange rates, is reminiscent of the
Japanese capital and currency markets, and has also become the hallmark of
the Bernanke Fed and the Obama administration.
However,
according to the latest Gallup poll, the Fed's intervention tactics are
boosting Mr Obama's ratings in the opinion polls.
Gallup says 46% of American voters now approve of Mr. Obama's performance in
the White House. That's up from 38% on October 4th, when the Fed rescued the
stock market from the claws of the grizzly Bear. Historically, the best
predictor of a president's re-election chances is the approval rating. Since
World War II, every president with an approval rating of at least 50% has won
re-election. Every president with a rating clearly below 47% has lost. The
most important driver of voter sentiment is the health of the labor market,
and the number of net new jobs that are created.
But the Fed
still has substantial work to do in order to insure Obama's re-election: among
the all-important independent voters likely to determine the outcome of the
upcoming election, 47% approve of the way Obama is handling his job, and 50%
disapprove. Many traders figure that if Obama is running neck and neck with
Romney in the polls, the Fed could decide to take the politically risky
gambit of unleashing QE-3, - printing anywhere from $600-billion to
$1-trillion, and in turn, inflate the Dow Industrials to record highs above
the 14,000-level.
If correct,
there could be serious side-effects that could derail Obama's re-election
campaign. For instance, unleashing QE-3 could lift the price of North Sea
Brent crude oil towards $150 per barrel, and jolt retail gasoline prices
toward $5 /gallon. QE-3 could also lift the price of Gold above $2,000 /oz and trigger a broad based binge of speculation in the
commodities markets, for grains, livestock, and base metals. That could usher
in a whole new wave of consumer price inflation that would erode the purchasing
power of US-wage earners.
Japan's
finance chief, Jun Azumi, said on Feb 2nd, that if
the Fed unleashes QE-3, he would exert maximum pressure on the Bank of Japan
(BoJ) to consider easing policy further, in order
to prevent the US-dollar from falling below 75-yen, and to protect its
export-reliant economy. "Yen buying has strengthened, led by short-term
and speculative moves on the back of expectations for low interest rates in
the US until 2014. I would like the BoJ to take
account of economic conditions and various factors in deciding policy,
including quantitative easing," Azumi
declared. Thus, if the Fed unleashes QE-3, the BoJ
could provide traders with a double bonus, - QE-4 in Tokyo, and a whole new
wave of yen carry trade speculation.
Saudi Arabia,
the central banker of crude oil, is doing its part to counter the effects of
QE in the Western world and Japan, by lifting its oil output to about
9.8-million barrels per day, up about 1.5-million bpd from a year ago. Riyadh
is keeping the oil flowing at near record levels, even while Libya's output
of 1.5-million of high-grade light crude is gradually re-entering the
marketplace. Still, the crude oil market is bubbly these days, with North Sea
Brent trading above $115 /barrel, and gaining some upward momentum.
Expectations of further rounds of QE in England, Japan, the US, and
"Backdoor" QE in the Euro-zone are buoying the crude oil and Gold
markets at historically high prices.
Suddenly, the
financial media is swamped with speculation about a possible Israeli
airstrike on Iran's nuclear facilities in the months ahead, which if correct,
could lift crude oil prices towards $200 per barrel, and wreck the fragile
recovery in the US-economy. But it appears as though Israel's public
statements about a possible military strike against Iran's nuclear sites are
a bluff designed to spur Europe and the US into adopting tougher economic
sanctions on Iran in the months ahead. After all, if Israel was actually
preparing to launch a military strike against Iran, it would not be
broadcasting such an operation so openly. Israel's attacks on nuclear sites
in Iraq in 1981 and Syria in 2007 were launched in utmost secrecy.
Thus, traders
in the Dow Jones Industrials reckon that the odds of an Israeli airstrike are
very low. Instead, the US is expected to placate the Israelis by ratcheting
up economic sanctions on Iran's central bank, its oil industry, and oil
shipping companies, in order to bring about a hasty collapse of the Iranian
economy. The key question is whether Iran would deliver the first strike
against Israel or US-bases in the Persian Gulf, if it thought its economy was
crumbling and tough sanctions were threatening to topple the Ayatollah's
regime. In any event, the tension in the Middle East is a convenient excuse
for oil traders to keep the price of North Sea Brent pegged near record
highs, and in turn, helps to buoy the price of Gold.
Whatever the
hurdles, traders have the utmost degree of confidence that the Bernanke Fed
will always devise a new rescue scheme, and place a safety net under the
stock market, if necessary, when risky bets go sour. Traders also believe the
US-stock market is entering the sweet spot of the presidential election
cycle, and it's very hard to bet against it. There is a strong historical
tendency for the market to trend higher over the course of the second half of
the presidential cycle. Thus, with the Fed working round the clock for team
Obama, and the size of the entitlement society reaching majority proportions,
Mr Romney is seen as the long-shot candidate to win
the presidency in November.
Romney's Road
to the White House seems like a
episode of Mission Impossible, - his mission is to enable a majority of the
American electorate to see through the Fed's smoke screens, and the Labor
department's fuzzy math. If Romney beats the heavy odds that are poised
against him, it would signal the end of Bernanke's tenure at the Fed, and the
end of his experiments with Bubble-mania and market manipulation.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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