The tug of war between borderline irresponsible fiscal inaction and expansive monetary policy defines the current market condition.
The upside can come from a combination of:
- a Romney presidential win next month (Republicans are generally viewed as business- and market-friendly);
- an acceleration of domestic economic growth; and/or
- progress on the fiscal front in late 2012/early 2013.
The downside can come from a combination of:
- the assertion of geopolitical risks (in the Middle East), which would elevate oil prices;
- a worsening domestic economy;
- less-than-expected corporate profit growth; and/or
- an inability to address the fiscal cliff.
"The man who promises everything is sure to fulfill nothing, and everyone who promises too much is in danger of using evil means in order to carry out his promises, and is already on the road to perdition." -- Carl JungBelow are my 10 baseline expectations that form the basis of my concerns and expectations for a weak U.S. stock market (which might put us squarely on a journey toward the road to perdition). 1. Macro malpractice: The wrong (monetary) medicine is being applied to the world's economies. Global easing is a blunt instrument operating through circuitous and dubious channels. It is a policy that will not necessarily elevate animal spirits, raise the price of risk assets or stir real economic growth. Having already taken interest rates to near zero, more cowbell will do little to offset balance sheet deleveraging and other structural (not cyclical) headwinds (e.g., high unemployment) and the need for the implementation of fiscal austerity around the world. 2. Unwholesome (policy-dependent) and sluggish economic growth continues: Domestic high-frequency economic data will continue to point toward 1.5% to 2.0% fourth-quarter real GDP. But this is unwholesome and not self-sustaining growth as it is reliant upon massive doses of liquidity. Moreover, income disparity is the natural outcome of quantitative easing, creating an imbalanced recovery that has and will continue to favor the wealthy. The continued threat of screwflation of the middle class raises social issues and will likely serve as a drag on economic prosperity, importantly influence and define election outcomes and continue to underscore the retail investor's disaffinity toward investing in the U.S. stock market. 3. An "unfavorable" election outcome: The Democratic Party will likely retain (in narrow victories) the presidency and control of the Senate. This result may be viewed as hostile toward business and investment markets. 4. The leadership deficit and fiscal cliff: There will be no movement toward addressing the fiscal cliff until early 2013, as there currently exists no political will (on the side of either party) to overcome partisan differences. Almost any outcome will involve a fiscal drag to next year's economic recovery.