Wednesday, August 11, 2010


CSCO's Chambers is confirming (and specifically citing) the Fed's economic concerns (stated yesterday) -- as they are clearly being seen in the company's customers' ordering behavior.

Unfortunatley it is not an upbeat call, and he just guided down on sales in the next quarter.

Deutsche Bank has revised its second-quarter GDP growth projections to +1.1%.

Today's report that the June deficit expanded to almost $50 billion (the largest increase in nearly two years) means that the second-quarter 2010 GDP will now possibly be revised to under 1%, a good guess is +0.6%, a marked slowdown from first-quarter 2010 GDP that was revised upward to +3.7%.

We are in a liquidity, tax and regulatory trap.

Yesterday, market participants waited breathlessly for the Fed's decision. Tuesday's quantitative easing (QE) "lite" was initially considered a positive, but, not surprisingly and upon further reflection, the market got pounded today.

In reality, QE lite doesn't move the needle, and lower interest rates have failed to stimulate growth over the past several months. Indeed, the most interest-rate-sensitive sector, housing, is now turning lower.

Consider that we are now nearly a year into "recovery," yet all the discussion this week is about the need for more monetary easing and the need to lower interest rates further. Doesn't this point to the frail economic foundation and to weak fiscal policy? And doesn't the generational low in interest rates mask the fundamental differences in place in this cycle? Yet, the Fed is acting no different than the previous Greenspan regime.

Federal Reserve policy has likely done as much as it can and as much as it should:

* Zero-interest-rate policy stopped the Great Decession and the economic freefall, but it has failed to create jobs.

* Quantitative easing has also helped to halt the financial crisis, but it did little to encourage small-business hiring.

* TARP stopped the carnage in the banking system, but it did little to encourage lending.

Monetary (and quantitative) easing may no longer be the solution to the plight of the sluggish and shallow recovery in the domestic economy. A new playbook is needed to create jobs, and the uncertainty of tax policy and the costly burden of regulation must be addressed.

I'm from Missouri, so color me not optimistic that our politicians will reverse policy any time soon, but, in the interests of growth, they should consider it.

Investors, too, are now in a show-me mode, as they wait for more economic data points.

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