Busch: 5 Things You Need to Know

With the holidays fast approaching, here are the top 5 for the week.

1. China’s inflation is soaring, but China didn’t raise interest rates. As rumored, China’s CPI came in smokin’ hot at 5.1% and was a 28 month high for the nation. (PPI was up 6.1%.) Food was the big driver of higher costs and was up 11.7% in the month. History buffs know that the last political change in China occurred due to runaway inflation and a rising up of the population against the incumbent politicos. The good news is that the PBOC (People’s Bank of China) did not raise interest rates and appears to be content with using regulatory and reserve requirements to manage policy. The other good news was that the targeted volume of banks loans for 2011 will be 7 trillion renminbi (or higher). Both of these facts led Chinese equities markets to rally 3% today.

2. Despite the rhetoric from the left, Democrats in Congress are likely to passPresident Obama’s tax cut extension and spending bill. Last week, House Democrats were angry about not being included in the compromise discussions the president had with Republicans and voted amongst themselves not to bring the bill up for a vote in their chamber. However over the weekend, there have been reassuring comments of the bill’s passage from Obama’s chief political strategist David Axelrod and from the Senate Majority whip Dick Durbin. The Senate votes for cloture today on the bill and should pass it by Wednesday. Then it will be up to the House and Nancy Pelosi to bring the bill up and vote on it. I expect it to pass this week. By doing so, the United States will be the only major industrialized economy not to move towards reducing fiscal deficits in 2011.

Ben Bernanke, Federal Reserve Chairman
Ben Bernanke, Federal Reserve Chairman

3. The FOMC meets this weekand will reaffirm their program of buying up to $600 billion in new assets. While the Fed may upgrade their policy statement, they are likely to continue to be cautious in their outlook due to the increase in the unemployment rate and the Ben Bernanke concern of hitting stall speed in the US economy (2.5% GDP). The dilemma for the Fed and QE2 remains how the markets view their actions and drive asset values against what they want. Both interest rates and gasoline prices have jumped to take money out of consumers’ pockets. On Friday, we discussed this on CNBC’s Kudlow Report. My view is that the Fed will keep its foot on the gas even if unemployment improves until chairman Bernanke has to go to Capitol Hill to provide his semi-annual report on the economy at the end of February. This is where Rep. Ron Paul will get his first crack at the Fed and you can expect difficult questions over QE2 to be brought up.

4. European Union leaders meet this week to improve and revise the EFSF bailout mechanism. Both Germany and France came out against the issuance of Euro EFSF bonds issued to fund the program. This is the penultimate question for the EU: can it take the necessary steps to change itself from a union in name only to a true fiscal union? Right now, they have a common currency and some common fiscal ties via the European parliament. However, they don’t have a true union where there is a central taxing and bond issuing authority. Right now, Germany has no control over what Greece does on spending. Therefore, Germany is reluctant to agree to any fiscal structure that mandates they provide funding to a bond that they have no control over the fiscal structure beneath that bond. Until this occurs, the European Union will struggle to enforce the rules for membership.

5. Equity strategists are getting very positive on the outlook for 2011. According to a Bloomberg survey, the S&P 500 will increase by 11% to 1379. This is the average of 11 strategists in the survey. I call it the 11 for 11 in 11. They cite rising corporate profits and large cash balances as reasons for their optimism. The extension of the Bush tax cuts will also help. Historically, we’re in the political sweet spot for stocks as well. The NYT did an analysis of the 3rd and 4th year of a presidential term for both stocks and the economy. The results were startling. “…in the years from 1946 through 2009, 62 percent of the American economy’s growth came during the final two years of presidential terms, compared with 38 percent in the first two years. A third of the growth came in the fourth years.” For stocks, it was even more pronounced. “An investor who owned stocks during the third years of terms, and stayed out of the market during the other years, would have earned profits more than twice as great as those that went to an investor following the opposite strategy, owning stocks in all but the third years.” Given this, it looks like 2011 will be a fine year for owning stocks.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.