Ralph Shell @ 12:29 PM, Tuesday November 02 2010
Will today's election, currently taking place, result in any big surprises? Currently the Real Clear Politics House estimate is that the R's have 224 seats, with another 44 seats rated too close to call. This is well above the 218 needed for control of the House. In the Senate, the RCP poll estimates that the R's will add 8 Senators to their ranks which would give them 49. This is still a minority since the one Socialist and the one independent usually vote with the 49 Democrat senators, but the Senate generally needs 60 votes to pass major bills. A sharp deviation from the RCP numbers would be a surprise.
The failure of the Government's plans to revive the economy and reduce the unemployment from the current 9.6% rate is one of the major reasons for voter discontent. After two years, the current administration is being taken to task for some of the failed policies. CNBC commentator Larry Kudlow recently wrote:
"The trouble with the whole Obama mindset is the notion that government can run the economy. That idea has failed. It is business that runs the economy, including entrepreneurs and risk-takers. Yet the animal spirits have been stifled, while the producers have been laughed at, mocked, and insulted.
The Obama class-warfare campaign against business and investment has created a wall of worry and a refusal to invest in the future. The incentive model of growth, where it must pay more after tax and regulatory costs to work, produce, and invest, has been discarded by Obama's extreme left-liberal Keynesianism. Predictably, higher costs -- including the cost of Obamacare, probably the single-greatest barrier to growth and jobs -- have forced the most productive factors in the economy to hole up and virtually shut down."
In my opinion Kudlow is right, the policies and regulatory atmosphere of this administration have been a big impediment to job creation. The failed stimulus spending plan is another reason the administration has lost confidence and votes. Perhaps recent German studies can provide another point of view.
The US government and its squad of Keynesian economists had cajoled Germany to participate in global stimulus spending to "jump start" the economy. When Fraulein Merkel refused, Germany was demeaned, and chastised as a uncooperative global citizen. A recent article in The Weekly Standard explains the German's rational:
"German policymakers do think the United States is misguided as a matter of economic reasoning. “We think they’re wrong,” says one top official. “We think you don’t get the multiplier they say.” The multiplier is the measure of how much economic activity results from emergency government spending. Discussions of the multiplier were at the center of the debates over the Obama stimulus plan. Christina Romer and the president’s other economic advisers argued that the multiplier would be around 1.6—the government would create $1.60 worth of economic activity for every dollar it spent. At those rates, who can afford not to stimulate? “Our research says the multiplier is more like .60,” says the German official. If he is correct, then a stimulus plan can actually deaden an economy rather than stimulate it. If he is correct, you might have been as well off to have taken the stimulus money and thrown it away."
With the German GDP currently increasing at the pace of about 7% or more compared to a puny 2.1% in the US, it is hard to argue with the Germans. The Obama administration, however, had vowed to "save jobs" even though it meant subsidizing nonproductive jobs in the public sector. Weak economic growth and job creation seems to have resulted, in part, from the $787B stimulus bill.
With additional spending no longer a policy choice, markets are now waiting for Bernanke and the FOMC to announce their decision. A recent survey of economists found about half thought the Fed program would be $500 to $750B, with another 30% voting for a $750 to $1T increase in the money supply. Almost all the economist think the market has already discounted the numbers.
It looks like the euro has been discounting the Bernanke QEII since mid September when the EURUSD broke out above the 1.30 level. We do not wish to have trades on during the eventful period, but we wonder, is there something new that will give us another upside leg? Or is it possible that the news is fully discounted and the USD will strengthen?
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.