Wednesday, November 06, 2013

Where Does the Fed’s Stimulus Money Go? Part V

Where Does the Fed’s Stimulus Money Go?

Part V – A Bigger Picture

By Dr. Van Tharp Trading Education Institute

My high school chemistry class was actually a lot of fun. Half of the students in the class were my good friends and I liked chemistry very much (hence the subsequent chemical engineering degree). I vividly remember one class when the teacher and one of the sharpest guys in school were debating a point — okay, arguing really — about a completely inconsequential topic and the whole class was becoming annoyed.

The teacher, Ms. Duncan, was seriously smart. The student arguing with her was even smarter (he’s now the radiology Chair at Boston Children’s Hospital and a Professor at some Medical School up there that goes by the name of Harvard). They only were arguing to top the other, hold their ground and prove a point. Meanwhile, the rest of us were bored stiff. So I stepped in and offered a baseball analogy — the rest of the class had just made a clean base hit straight up the middle, and those two were arguing over where the foul lines were drawn. Ms. Duncan said, “That has nothing to do with the base hit!” I said, “Exactly.”

I love the saying “can’t see the forest for the trees” because it applies so often in real life. People just naturally seem to get caught up in the minutiae, the immediate problem at hand or their own little problems and fail to recognize the big picture. See where I’m going with this?

Welcome to the world of Washington politics and the high holy keepers of the worst examples of “can’t see the forest for the trees”.

Kicking the Can Down the Road (Again)

The biggest news of the last week was the refunding of the federal government’s day-to-day operations. Non-essential government employees returned to work and the politicians got to delay really debating the debt ceiling again until early 2014. Hear that can a-rattlin’ down the pavement?

If we all step back calmly and look at what just happened without any political party prejudices, we quickly see that we don’t have a budget problem, we have a governance problem. We have lost the ability to efficiently and effectively legislate. And I’m pretty sure I’ll never see a national political body make a difficult decision again in my lifetime. All decisions are vetted through the lenses of entitlement groups — whether they receive a government handout directly (those on the left can yell nasty things about me) or whether they receive special treatment by the government like the financial institutions and the industrial-military complex (those on the right can now say ugly things about my lineage).

The Big Picture in One Cool Graphic

Now, let’s all hold hands and solemnly repeat, “The problem is not about raising the debt ceiling, the problem IS the debt ceiling”. We are in the midst of the largest financial engineering experiment in the history of economics as we know it. The unwinding of this will be ugly, barring some technology / productivity quantum leap that allows the global economy to rapidly expand and grow our way out of part of the problem.

In one graphic we see a startling depiction of the big picture (it’s from the Ricochet blog — a conservative gig, but I did vet the numbers which seem reasonably accurate):

First of all, it’s pretty clear that the debt problem (or more appropriately, the rate of debt growth relative to revenue growth) exists on both sides of the aisle — it is a national problem that doesn’t belong to one political party more than the other.

I now firmly believe that a government that can’t make tough decisions on how to slow spending or increase revenues will have tough decisions thrust upon them by another financial crisis. Whether that crisis is bad, like 2008 or really bad like 1929+, it’s tough to see us getting a resolution that looks or sounds anything like a “soft landing”.

In weeks to come, we’ll look at some things that traders can reasonably do between now and then (like continue to enjoy the stock market climb until price tells you otherwise).

Click Here to Read Parts 1, 2, 3, and 4 of Where Does the Fed’s Stimulus Money Go?