The effect of a continued fragile US economy on public sentiment were well demonstrated this week as the results of the mid-term elections lived-up to forecast expectation. The House and the Senate saw a large swing away from the Democrats toward Republicans on the back of public disillusionment and the outcome of prolific 'Tea Party' campaigning that has managed to give the Republicans a new lease of life.
To the overseas observer these US mid-terms will probably be remembered for the message-delivery method and manner which questioned the innate workings of the American political machine, albeit at a high level so as to convey core themes.
Yet the workings of the nation's political machine and the workings of the nation's economic machine are undoubtedly interwoven, the efforts of the Keynesian 'pump-prime' having saved the country from financial collapse in 2008, now seen to be lack-lustre in its mid-term potency, thereby questioning its impact on the longer-term outlook. The 'bail-out' of the US via QE1 came at a very hefty price, especially so in terms of (inter)national, federal and state debt levels. The incurred indebtedness now weighing very heavy on efforts to properly resuscitate the economic well-being.
Of course at its heart is economic philosophy, and attitude toward the fewer, and less powerful, fiscal and monetary tools left in the Fed's & Treasury's shared tool-box. The primary question for capital markets and the public at large as to whether yet another round of well warned prime-pumping via QE2 will actually provide enough effective benefit that feeds through beyond Wall St to Main St. This round of QE is of a different character, its size of $600bn, $100bn larger than previously expected, but drip-fed from mid 2011 in lots of approximately $75bn per month, depending upon conditions.
As a presentation of a QE approach this then looks sensible, but the broader question is whether in effect the new round of fiscal stimulus actually assists a proper re-orientation of the US economy or whether it maintains what could be argued as an over-valued 'false-floor' to the national economy; from QE1's frenzied liquidity feed to capital markets; especially toward those US corporations that are well exposed to Asian and South American income streams.
investment-auto-motives concurs with the Wall St Journal's 'Heard on the Street' column (2nd Nov), stating that much of the heavy lifting was done by QE1, so to what end QE2 if both equities and bond markets have already strengthened? The real concern is that QE2 has little ultimate trickle-down effect and inadvertently maintains the divide between Wall St and Main St, as the labour-force content of the country's cost-base grinds painfully through its necessary shrinkage, whilst the low cost of capital available makes for a bonanza period in corporate stock buy-backs and M&A activities; something investment-auto-motives expected to naturally occur even before QE2.
No critically observant markets follower has believed the “strong dollar” rhetoric, even after recent gains against the Euro and Pound, with the reality of a long-weakened US$ key to America's need to export its way out of the mire. As ASEAN and Mercosaur regions grew apace over the last year, so US exports ranging from agricultural equipment to specialist factory plant to pharma also benefited, but as the RoW slightly cooled so it seems the US authorities saw a need to re-involve themselves. Thus the Dollar's mid-week tumble immediately after the Fed's QE2 announcement only accords to expectation by both government, the markets and critically foreign investors who will either spy FX value-driven buys at stock and company level for the fundamentally strong, or seek to withdraw from what they view as an increasingly destabalised region, with preference going to still strong BRIC+ countries, safe-havens such as the Hong Kong exchange and expected rebound markets such as the UK.
Even given this apparent negativity, the intrinsic role and remit of QE2 may be far more than the broad exercise in re-assisting the economy presented. It may in effect have been designed to be a type of implicit buoyancy-aid specifically for those domestic and Canadian institutional investors who to date may have had little confidence in the mid-term traction of the re-born General Motors.
GM's general performance both at IPO launch and its critical short & mid-term stock trading dynamic is critical not only for the company itself, but the nation at large. Although a re-invented 'smoke-stack', given its broad up-stream and down-stream value-chain reaches across a myriad of spheres, GM will be seen as a bell-weather for the US economy
Thus for investment-auto-motives, the announcement of QE2 here and now, coming only a few weeks before the price-setting and availability of New GM stock – in its various guises of: new common stock, 3-for-1 exchanges and convertible preferred shares – is very telling indeed.
Perhaps it was well recognised that political and financial collateral damage could well be incurred from previously potentially higher IPO 'investment losses' to the Treasury, Canadian and Ontario Governments, the UAW and to Motors Liquidation Co holders/investors.
Instead the path ordained appears to see GM listed at the higher end of its $26-29 range with the almost implicit assumption that the month on month dispersion of latter-day liquidity will either prop-up any 6-month interim flailing, or otherwise help boost what have been 'flat' or slow-growth GM shares.
At a time when GM should be seen to fully let-go of its mother's apron strings, after 2 quarters of impressive results and the confidence to talk about the very real macro-headwinds it still faces, it seems that the 'Government Motors' nick-name - whilst slowly fading - may take another year or so to fully disappear.