Despite growing concerns about the growth in Federal Reserve spending, voiced
this week by none other than famed investor Warren Buffett, Washington seems
determined to keep its foot on the money-pumping accelerator for as long as it
can. But even though Washington continues to ignore the realities, alarm bells
are beginning to ring at town halls across the country.
Last week, the Fed left its key short-term rates frozen at 0 to 0.25%, enabling
banks to borrow at near zero and reap spreads as high as 6% to 24%. The Fed
also continued its policy of paying interest on banks' reserves, further
boosting Wall Street's bottom line. The government has decided to save the
banks, no matter how much the public has to suffer.
Worse still, the administration has been largely silent over the obscene
bonuses paid by banks to the very executives whose
casino mentality caused a financial crisis that the International Monetary Fund
now estimates has cost the world some US$7 trillion. At financial firms that
have received bailout money, it has been estimated that thus far in 2009
bonuses paid to executives have exceeded profits.
However, with the pedal still hitting the metal, the Fed has begun to discuss
plans of a so called "exit strategy" that would pave the way toward higher
interest rates.
These statements of economic neutrality were based upon the Fed's impression
that the recession is ending. But the Fed has not yet taken any meaningful
actions to curb its potentially inflationary policies.
For now, mere words are enough to encourage American stock markets, but only
briefly. More recently, US equity investors gradually are facing up to the fact
that, while stock prices rose recently by some 45%, earnings, although "ahead
of estimates", have fallen by almost 30%, despite savage cost cutting and deep
inventory depletion. The more important top-line revenues have fallen by about
15% and free cash flows are tumbling in response.
The public, who feel the vicious bite of "real" 20% unemployment (rather than
the official rate of 9.8%), are becoming increasing distrustful of big
government and deeply resentful of its increasing grasp of their lives. The
cracks are beginning to show.
A key element of the Barack Obama administration is its 1,000-page healthcare
reform bill. Despite the impossibility of reading, let alone understanding, the
legislative behemoth, Obama tried forcefully to push it through Congress in
just two weeks.
And, despite the clear failure of government healthcare in many parts of the
world, including domestically in Massachusetts, the administration is still
looking to move ahead with a public option plan.
The public is not yet willing to play ball. While much of the biased media
paint the rowdy town hall meetings across the country as merely the clumsy
machinations of the Republican Party, the events are revealing the deep
misgivings average Americans have about the growth of government. If this
movement spreads, it could have a dramatic and healthy effect on the American
economy in the long-term.
At their core, Americans hold individual freedom and self-reliance dear.
Therefore, by nature, they are not socialists and resent big government. To
them, the actions of the administration, supported by a compliant Congress, are
clear: use massive amounts of public funds to support the financial elite,
maintain massive entitlement spending to secure votes, and extend the grasp of
big government through healthcare and other measures. Their anger is justified.
President Obama campaigned on political "change" and an end to the abuse of
taxpayers. So far, he has massively increased government entitlement spending
and has failed to loosen Congress's firm grasp of the pork barrel.
It may be that the deep resentment expressed in town halls will embolden
ordinary people to pressure Congress to stop the train. If that happens,
America will begin the long and painful road towards economic restructuring,
individual freedom and enterprise. Under those conditions America would
represent a great investment opportunity.
John Browne is senior market strategist, Euro Pacific Capital. Euro
Pacific Capital commentary and market news is available at
http://www.europac.netIt has a free on-line investment newsletter.
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