Help Is Not on the Way

06/08/2011 11:02 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The market is losing faith in current economic policies, as growth fades and politicians and bankers bicker, writes Senior Editor Igor Greenwald.

Tuesday was another tough day for Team USA.

It dawned in the immediate aftermath of a Washington Post/ABC News poll suggesting the demoralized and deeply divided “team” had once again lost confidence in its captain.

Some 59% of those questioned said they disapproved of President Obama’s handling of the economy. And a whopping 49% of the respondents disapproved strongly, whereas the approving 40% minority was evenly divided between “strongly” and “somewhat.”

That economic approval rating was down from 50% a year ago, and 60% during Obama’s brief 2009 honeymoon with the electorate. On the federal budget deficit, 33% approved of his efforts and 61% disapproved, including 49% strongly.

The president’s most eloquent economic advisor has just announced he’s leaving, becoming the latest aide to set off for pastures less haunted by the ugly public mood.

So that was how Obama found himself—at a joint press conference with German Chancellor Angela Merkel, fielding a leadoff question about “the threat of a double-dip recession” and “the specific policies” needed “to head it off.”

And the only policies the president could offer up, given the indecent state of public finances, were the contingencies already deployed to doubtful effect at the beginning of the year, namely:

  • the 2% payroll tax holiday
  • another extension of unemployment benefits
  • and business tax breaks

Enacted for a one-year term under the deal extending the Bush tax cuts last Christmas, these sops still represent the entirety of the White House’s economic strategy, apparently.

No wonder the natives are more restless than they were in the depths of the bear market, amid massive layoffs. They no longer see the audacity of hope, but rather a paucity of ideas.

And of growth. “I have to express some frustration with this economy,” Atlanta Federal Reserve President Dennis Lockhart was saying early Tuesday afternoon in Charlotte, N.C. “Like you, I’m sure, I’ve wanted the recovery to come along steadily and decisively. Instead we’ve gotten inconsistency, hesitancy, unevenness.

“I’m troubled by what you might describe as a lack of conviction in this economy,” Lockhart would go on to say. He prescribed strong banks, prudent budgeting, and low inflation, and went on to advocate that the Federal Reserve adopt an explicit inflation target.

That’s not even a short-term fix, much less a cure for the economy’s many ailments. But surely Federal Reserve Chairman Ben Bernanke would be more generous in his own speech later that day. Surely he would throw Wall Street some crumbs if not a bone?

Bernanke did speak in Atlanta 15 minutes before the market close in New York, and acknowledged that growth has been “somewhat slower than expected” and “frustratingly slow” for the millions of the unemployed and the underemployed.

He’s counting on better times ahead, apparently strictly on the strength of the easier credit conditions the Fed has nurtured. And only if “the still-fragile recovery” isn’t choked off by a “self-defeating” “sharp fiscal consolidation.”

With all that to look forward to, the market promptly sold off into the close, reversing a half-hearted relief rally. And that was before the country’s leading private banker, JPMorgan Chase (JPM) CEO Jamie Dimon, spoke up during Bernanke’s question-and-answer session, intimating that the Fed itself is hindering the recovery by over-regulating banks.

The Fed chief diplomatically acknowledged Dimon’s point without conceding anything on the policy front. But here’s the nation’s leading banker claiming the Fed is out of touch with economic realities.

Dimon is chafed by a Fed proposal to boost reserve requirements for the biggest banks to make them safer. He has threatened to stop buying mortgages if so inconvenienced.

And why bother, really, when one can borrow US dollars nearly free of charge, lever that money, and then invest it in Australian bonds yielding 6%? Australia is investing its commodity windfall in education and infrastructure, while Washington argues how much to cut and when.

So, to sum up, everyone’s frustrated—and if our momentum doesn’t carry us beyond the current soft patch, there isn’t much gas left in the tank.

On the plus side, the market is hated again, with retail investors pulling money out, and hardly anyone expects additional help from policy makers any longer.

So there is nothing left to do but to roll up our sleeves and work. Go team.

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