Obama’s Great Power Play and 2012 Speculations

I like to speculate (don’t we all?) and come up with unique ideas on what the future may hold; a Peek into the Future you could say.  I felt compelled to jot down some potential and intriguing medium to long-term trends taking hold regarding US government policy.  But first, a quick recap.  My US Gov’t Policy outlook (4th on the list) is playing out very nicely.  Austerity has gripped the halls of Washington and our political system is in a state of deadlock.  I was one of the few, or better said, was distinct from most commentators on bubblevision declaring how “deadlock” would be beneficial to the US economy.   I also forecast (since February) how we’d see an interesting dynamic develop in Congress.  Republicans, smelling political blood, would make approval of any new stimulus measures very difficult.  The last thing they need is for an improving economy while headed into the 2012 elections.  Obama would have the upper hand.  This situation is not lost among most politically astute observers.  The American political system is rotten from the core in my view; but that rant is for another day.

Now on to the speculation.  As many are realizing, monetary easing is at a dead-end (for now).  Inflation metrics have made it very difficult (Dudley is a Dove) for the Fed to justify any additional quantitative easing (QE) programs.  Furthermore, the political rhetoric against the Fed rose to a whole new level when Texas Govenor Rick Perry said Bernanke would be a traitor to America should he resort to money printing in 2012.  Suffice to say it is probable that the Fed won’t be able to initiate another major QE program in the near-term without some serious negative consequences.  Instead, they introduced the new strategy of changing the language of the FOMC’s policy statement, which had profound effects on the Treasury market.  Numerous other strategies remain at their disposal, such as changing the term strucuture of their securities portfolio and/or reducing the interest-rate on reserves in an effort to get financial institutions lending again.  I suspect that they may turn to these actions before they initiate QE3 (barring a Eurozone implosion).

Despite the constant bashing and demonization from the media, analysts, foreign gov’ts, you name it, let’s not forget that Bernanke remains a smart man.  He is a student of the depression.  His tacit “approval” for more stimulus confirms my sentiment that monetary policy isn’t a panacea for our current economic woes; but perhaps when used in conjunction with fiscal policy, yields the most bang for one’s buck.  It did in 2009 right?  I am sure Bernanke would prefer to attack the economy’s current malaise with fiscal backup from Washington and not go at it alone, risking critically damaging the market’s perception that the Fed remains in control of the situation.  I suspect that at some point he’s conveyed this sentiment to Obama.  Obama’s proposal for additional fiscal stimulus soon after the latest FOMC meeting may not have been a coincidence.

Many, including myself, view his September speech on job creation as the most important of his presidency.  Opinion polls are looking dismal and I bet Republicans are elated with the current situation.  They’ve got Obama right where they want him.  His calls for stimulus are sure to fail when they reject his measures in Congress.  The economy will suffer as a result.  The presidential race will be like taking candy from a baby as Republicans attack the failure of his economic policies.   Obama’s no pushover though.  He was elected to the presidency for many reasons, one of them being a good politician.  He has repeatedly brought up his disagreement with reducing entitlement programs while “millionaires and billionaires” go scott-free.  He states that most of the fiscal help is for the middle class and the less fortunate.   The man knows politics and I think he’s suckering the Republican party into an ingenious political trap.  During the past week, we’ve seen a profound psychological change with regards to the super-wealthy.  Warren Buffett announced his support of tax increases for the ultra-wealthy, for the good of America.  Meanwhile, Howard Schultz (CEO of Starbucks) supports boycotting campaign donations in order to restore confidence in our political system, a measure that has gained traction with other prominent CEOs.  In my opinion, these announcements are game-changers in the political-arena and a developing nightmare for the Republican party.  They are pivotal in that they give Obama a “sun-bright” green light to present tax-increases for the wealthy and additional stimulus to aid the lower and middle-class for debate within the newly formed super-committee.  Should Republicans oppose these proposals, Obama has carte-blanche to politically blast them to smithereens.  I know it’s only one man, but Warren Buffett’s endorsement, mixed with the common sense to tax the ultra-rich for the benefit of America is akin to wielding a “Tyson-like” political uppercut.  A prolonged rejection of tax increases for the wealthy or much needed stimulus for America’s lower and middle-class, especially with a worsening economy would effectively KO any Republican hopes for a shot at the presidency.  What will be important is whether Obama is successful in framing the situation in this light.  Like I said, the man is an extremely shrewd politician; I’m sure he knows this.  So, my speculation is that we’ll see some sort of stimulus package passed in late December of this year or early January 2012.  Republicans will be forced to fold in their opposition or commit the biggest political blunder since Bush’s “Mission Accomplished” banner.  They would devastate their shot at the presidency even before the contest begins.  As a reference in tracking our upcoming “fiscal agenda”, please see here (h/t Zero Hedge).

Recent economic data has been very disappointing and risks to the global recovery are elevated.  There’s a dangerously high probability that the US enters recession in the short-term (perhaps it’s already in one!).  By the time December/January rolls around, the economy is more than likely to be sorely in need of any stimulus.  In this scenario, inflation metrics will have dropped and the Fed would have justification to unleash another QE program.  From Bernanke’s standpoint, he may be high on some serious schadenfreude as critics of QE (inflation-phobes) are silenced and deflation is once again the imminent danger.    Market participants would be begging for the Fed to do something.  Armed with fiscal stimulus, Bernanke would be in prime position to fire the QE bullet.  When taken together, 2012 may turn out to be a replica of 2009.  The potent cocktail of fiscal and monetary stimulus would translate to risk markets bottoming sometime in the first half of the year and posting a sizable rally, to the disbelief of the bears.  I wonder what sentiment will look like come February-April?

Whether both policy prescriptions are the magic elixir that our economy needs to finally exit from this god-awful “growth recession” is beyond the scope of this article.  With a very clouded outlook for the global economy, who knows what’ll happen?  Perhaps they aren’t enough to overcome our economy’s structural impediments.  Or possibly they’ll result in serious stagflation as constant application of QE bites back.  Or maybe they end up being just what the doctor ordered as they carry the economy through the final innings of the balance-sheet recession.  By then China may be in a position to drive global growth resulting in the famed US manufacturing renaissance.

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