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Farr: Dow 13,000 and More Fed Easing

AP

Another day, another Republican debate. The DC strategy couple of Matalin and Carville spoke at a small gathering we attended recently.

Matalin said that few understand how difficult it is to unseat an incumbent. Carville said three things: Romney will be the candidate; Romney cannot beat Obama; but Obama can beat Obama.

From their comments, it sounds like they feel this election will be the President’s to lose. With more than eight months to go before the Presidential election, color us sick-to-death of all of it.

Big policy decisions in Washington have come to a standstill. Real votes and deadlines have been comfortably pushed beyond November. Though headlines breathlessly report of budget proposals and tax plans, be assured that nothing will happen beyond the political posturing.

While citizens wait and watch this embarrassing, deforming process unfold, investors continue to wrestle with the significance of Greece, and Europe, and what may eventually happen post-November when the Capitol Hill cabal are faced with taking real action. From any perspective, the electorate expects a diminished flow of government dollars. Moreover, they expect that deficit spending will be stanched and a path to fiscal responsibility will be restored.

Keynesian spending has exceeded rational sustainability. Even Keynes called for the reasonably timely repayment of debt incurred during economic downturns. Our current debt will take a lifetime to bring under control, and more time to repay.

The good news is that stock priceshave been doing well, corporate earnings are increasing, and economic data are improving. It is a fragile recovery but a recovery nonetheless. But here’s the rub. What if, as happened in the 1930’s, fiscal and monetary policies are tightened before our toddler economy can bear the load? This is Chairman Bernanke’s great fear.

We were shocked in January when the Fed extended the projected period of near-zero interest rates from mid-2013 to late-2014. In addition, Mr. Bernanke vowed to provide additional support should conditions warrant. It was this language that sounded a lot like a promise of a third round of quantitative easing or QE3 .

So what gives? If the economic data are improving and unemployment is indeed falling, why are we hearing all of this dovish, accommodative talk from the Federal Reserve?

Our best guess is that the Fed is trying to protect the economy from the executive and legislative branches and all of the policy uncertainty they create. We think the Fed sees QE3 as means to inoculate the recovery against potential shocks from fiscal austerity and policy uncertainty. As rhetoric of potential spending cuts and tax increases becomes more strident, I expect talk of QE3 to get louder. In many ways, the Fed is insulating investors from politically expedient Congressional actions that have the potential to derail the nascent and fragile recovery.

All are in tough spots. The President and Congress will have to take responsible fiscal steps that will upset some voters. The Federal Reserve will have to continue its delicate dance on the head of a political pin while fighting to maintain its independence. And Americans will have to endure the shenanigans and do what Americans do best: work, aspire, dream, and achieve. We are the one country that has done it over and over and against great odds. The odds are considerable at present, but woe to him who bets against US!

Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.