The Republican Party, with the help of the Tea Party, swept the House of Representatives with a massive pickup of at least 60 seats. The Federal Reserve made another historic announcement with its $600-billion “Quantitative Easing” program (QE2). The October non-farm payroll number came in at a positive 151,000, and the unemployment number remained elevated at 9.6 percent for the month.
All of this transpired in the course of one week. So, what’s next? Hold on to your seats. Consider the following:
1. The U.S. dollar is falling on foreign-exchange markets and will continue to fall as the Fed aggressively prints money for the next eight months in order to monetize U.S. federal debt. The cash reserves will pile up in the banking system and eventually be used by the financial system for speculation, resulting in minimal benefit for the real economy.
2. The U.S. banking system is holding a “shadow inventory” of about 4 million foreclosed residential properties. The inventory of unsold properties will continue to swell to easily double the current level and, at the present rate of liquidation, will be hanging over the housing market for years. Home prices could conservatively fall another 20 percent.
3. U.S. corporations — which economists boast of holding more than $1 trillion in cash — never mention that over 40 percent of the cash is held “offshore.” The cash will not come home until the U.S. dollar stops falling, which means that it may never come home at all.
4. By mid-December of this year, the “99ers” will appear. All 1,470,000 of them will ride in on the first wave. These are people who have been on unemployment benefits for 99 weeks and will see their benefits expire. The next wave will come by April of next year, perhaps as many as 2 million more. They will have to get employment (good luck with that) or food stamps, or both.
5. Balancing state budgets in the current fiscal year will be a major issue going forward for the majority of states. States have seen a modest improvement in revenue, mostly from tax increases, but further tax increases will no longer be an option; they will have to start cutting expenditures. State employees will be dumped from the payroll and pension benefits will be closely examined as a means of conserving cash flow.
6. Earlier this year, the federal debt ceiling was raised by $1.9 trillion to $14.3 trillion, in order to postpone the issue until after the election. It will have to be raised again early in 2011.
That’s when the real food-fight starts in Congress. The Republican-controlled House will use the process to strip fat and meat off the bone. There will probably be meaningful across-the-board cuts in discretionary federal spending, no more bailouts for Wall Street, and very probably no more federal cash transfers to states to plug their budget shortfalls.
Someone needs to be sure the new governors of California and New York get the memo.
7. The stock market traders will like the sugar buzz from the Federal Reserve till they don’t like everything else; then the market will roll over. No one has a clue when, or from what level, but the market will roll over. The decline will be properly perceived as one more failed attempt by the Fed to manipulate asset prices.
In the meantime, gold and silver prices will continue to spike higher. The mining companies could easily become big dividend payers as most gold miners are now clearing almost $1,000 per ounce of free cash flow for every ounce they pull out of the ground.
If the price of gold goes up by another $500 per ounce, which it easily could, the dividends will really flow.
Then the whole planet will finally come to realize that the “bubble” is not in the price of the metal but in the volume of fiat currency reserves being dumped into the financial system by the Federal Reserve.
Buckle up, it’s going to be a bumpy ride.
[Fred A. Kingery is a self-employed, private-equity investor in domestic and international financial markets from New Wilmington, Pa., and a guest commentator for The Center for Vision & Values (www.VisAndVals.org) at Grove City (Penn.) College.]
