Prepare for a Politics-Driven Market

 | Sep 30, 2011 | 9:30 AM EDT
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The debt-ceiling debate in August that sent consumer confidence down the drink along with our once-sterling credit rating was a small taste of the shenanigans that await us as a country, and as investors, as the presidential election cycle begins in earnest.

Expect good old-fashioned smear politics as each party does their best to draw clear distinctions between the pillars of being either a donkey or an elephant.  Hopefully, by the point President Obama is in full campaign mode (he's in semi-mode now) there will have been a resolution to the EU Greek-led tragedy.  But that's uncertain. I do anticipate the political process, dominated by Republicans seeking to portray the sitting president as a non-job creating extremist and Democrats portraying Republicans as back-pocket buddies to the rich, to weigh negatively on the markets.

Markets will be paying careful attention to polls and comments that are likely to be over the top by both the president and the challenger.

For a start, let's take a look at Gov. Rick Perry. The Texas maverick had some choice words to two men in powerful positions in the financial community.  First up was Fed Chairman Ben "Helicopter" Bernanke, who is apparently is "printing money" out of thin air. Technically this is incorrect as the Fed does not print money. The Treasury Department is responsible for that fun exercise.  The printing money concept has become a modern day buzzword of both political parties when confronting the Fed's unusual measures to reignite the economy.

To lend to a bank, the Fed simply uses a computer to mark up the size of the account they have with the Fed.  In this sense, the Fed creates money electronically, but that doesn't mean the value of the dollar bills and coins in our pocket are worth less, as Perry proclaimed. To make those dollar bills and coins worth less, inflation has to get out of hand. That happens if banks are loaning just anybody money. But lending is tight, no matter what Jamie Dimon says.

Not only has M2 money supply seasonally-adjusted only risen 8% from the beginning of the year, consumer price inflation excluding food and energy (Fed uses this measure) is contained due to a rocky consumer spending recovery.  Moreover, corporations are having trouble exercising pricing power. I see this in most financial releases that I comb through. 

"The statement towards Chairman Bernanke needs to be very clear to him, that making monetary policy to cover up bad fiscal policy is just bad public policy," Perry said. "What we're seeing is a Fed that is getting involved in things that frankly it does not need to be involved with. Printing money doesn't do anything at this particular juncture except make the dollars in our pocket worth less money, plus it puts us in jeopardy of greater inflation in the future."

A second target for Perry was Warren Buffett. His criticism wasn't scathing per se, but he did manage to get a point across that the Oracle of Omaha was removed from the things happening in our economy. I Buffett and all his wealth know exactly what is going on in places with zero job creation. Berkshire operates in consumer-sensitive industries like furniture and ice cream, and he bought a railroad that undoubtedly supplies real-time information into U.S. business trends.

"Mr. Buffett is a real intelligent individual, but I can promise you he doesn't know what's going on in places where the job creation is at zero because of over-taxation and over-regulation," Perry said.

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