Monetary Game of Chicken: The Fed Will Win
Credit Suisse, by way of FT Alphaville, offers the most sensible explanation of what has been driving the recent episode of irrational exuberance, especially since the most recent better-than-expected employment and housing data: international money escaping from disaster areas (presumably China, Japan, much of Europe, and possibly everywhere else except Canada and Australia -- presumed by me, not Credit Suisse). As domestic individual money wakes up and withdraws, it's comforting to know that international dumb money can be counted on.
It is indeed a strange world we are living in. The U.S. can most afford inflation risk, especially commodity inflation, which is the most likely consequence of monetary over-easing as demonstrated in the aftermath of QE2. This is due to several factors:
- U.S. dollar is still by far the most prominent reserve currency, thus can export inflation to the rest of the world like no other. I know, it won't last forever, but tomorrow is another day.
- U.S. is a big agricultural exporter.
- U.S. dependence on foreign oil is greatly exaggerated for cheap political reasons. U.S. has ample domestic oil production, easy access to vast foreign sources, and is destined to be the biggest natural gas producer for a long time to come.
Yet the Fed sees no need to ease as inflation expectation staying in the comfort zone and economy is all in all quite resilient and stable. As to unemployment, first of all I simply don't understand why it's central bank's business and, secondly, I suspect the Fed knows quite well the absurdity of this mandate and that there is nothing it can do here.On the other hand, the eurozone could use some serious easing. It should be targeted to specific countries and regions; unfortunately the politics has caused a complete paralysis so far. In fact, I find it amazing that the market still gives any credence to what European Central Bank head, Mario Draghi, says. I don't know where the pain threshold for meaningful action is; but it's clearly not yet been reached. Hopefully it won't be reached until the world has all but written off the euro and prepared for the day after. So here's to the eurozone paralysis. China still enjoys nominal growth rates that are the envy for the rest of the world. But the real growth is far from certain, especially considering the massive M2 expansion since '08 (official number is 4 trillion CNY, or about $700 billion; real number who knows but it's safe to assume it's bigger).
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