Here Comes Helicopter Ben!

August 22, 2011

Equity markets are opening stronger this morning as fixed income markets back up a bit. The S&P is opening up about 1.5%as investors begin speculating on announcements later this week coming from the Fed’s annual meeting in Jackson Hole. Last year, Fed Chairman Bernanke reacted to a weakening economy and soft stock market (sound familiar?) by setting the stage for QE2. The political climate is quite different this year, so the Fed may be less inclined to act, at least during this meeting. Volatility should remain high, especially as we move towards the end of the meeting.

Bloomberg was able to wrestle lending information from the Fed by utilizing the Freedom of Information Act. What they found was that during the financial crisis, the Fed lent as much as $1.2 trillion to both domestic and foreign banks.

The President has begun the “leaking process”, whereby he floats pieces of his upcoming proposal to the public to test the public’s response. Yesterday strategist David Axelrod said that extending the payroll tax is “absolutely critical” to the President’s plan to create jobs and reduce the unemployment rate. He also said that infrastructure spending, including bridge and highway reconstruction will be part of the proposal.

Rebels have seized much of Tripoli, the capital of Libya. Brent crude, which has been trading at an unusually high premium to West Texas Intermediate for the past year, finally corrected on the news in anticipation of resumed exports and production.

Ford and Toyota announced plans to collaborate on a hybrid system for light trucks and SUV. Their goal is to have the system in production later in the decade.

Barclay’s feels that the markets are pricing in another $500 billion in Fed bond buying coming out of the Jackson Hole meeting. Eventually QE3 will come to fruition, regardless of its ineffectiveness in combating economic malaise. Why? First, this is a very reactionary Fed, typically behind the curve when economic conditions are changing but quick to react when the markets are in crisis. Second, the Fed has a limited set of tools, and are trying to address a problem whose scope exceeds the reach of these tools. Third, through their tighter than normal link with Treasury, they are very tied to the political fortunes of the President and Wall Street, which itself is very tied to Treasury.

For a life time Angels fan it was a great weekend as we swept the Orioles while the Rangers lost two of three to the White Sox.

Have a great afternoon.

Ned