Just as it seems, they will finally have a moment of basking in reflected glory. The permabears are throwing out the notion of another plan to stimulate a quantitative easing (QE4). What makes this intriguing was last week’s minutes that show the Fed is very worried about weakness in the global economy, especially Europe. Of course, the Fed has a duel mandate to tame inflation and stoke employment. However, in the real world, they have done neither, though the risk taken thus far goes beyond responsible actions. Also, further action would be like giving a patient open-heart surgery on Tuesday and again, the following Thursday. Of course, the Fed has to be frustrated with their bags of tricks as the recovery has been slow, and uneven. Fewer areas of Main Street are better off than at the start of the Great Recession.

Make no mistake, there is no greater threat to our economy than the growth of the global economy decelerating rapidly – especially with Europe leading the way. Last week, the International Monetary Fund (IMF) released estimates for the Euro-Zone over the next 12 months, and while the numbers are unnerving, Christine Lagarde, IMF Managing Director, says the odds are "not significant."

International Monetary Fund 12 Month Euro-Zone Economies
40%	Recession
30%	Deflation

Over the weekend, Fed Reserve Vice-Chair Stanley Fischer spoke about the global economy that lends credence to the notion the Fed will factor in the global economy in their decision-making process:

“In the third part, toward the end of the lecture, I will discuss the responsibilities of the Fed in the world economy. Like other national central banks, we must answer first to our own citizens and taxpayers. But, because of our size, developments in the U.S. economy will always affect foreign economies. And, since the U.S. dollar is the most widely used currency in the world, our interests in ensuring a well-functioning financial system inevitably have an international dimension.”

I am not sure where this ranks on Yellen's infamous dashboard, but the needle is in the danger zone. It does not mean that there will be a QE4, although it would provide a perfect cover if the US economy hits a speed bump. Nevertheless, going back to the well is an admission that Fed influence and policy does not work, so it has to be an extraordinary circumstance before the Fed takes action. There is another part of this dilemma, and I think it is greater for the economy and America's future.

Revenge of Anglo-Saxon Economics

For a couple of decades, the old guards of socialism fretted in anger as the economic miracles provided a  push from Ronald Reagan and Margaret Thatcher that created an abundance in America and the United Kingdom and beyond. Global trade surged, and economic prosperity came to nations previously thought to be permanently second and third world nations. Let us fast forward. The economic crisis and the mishandling of bailouts that ushered in the Great Recession was the perfect opportunity to denounce free market capitalism. Angela Merkel and Nicolas Sarkozy jumped at the chance to blame the Anglo-Saxons, as the crisis morphed into a serious threat to the Euro-Zone, and more voices joined the chorus:

• Nouriel Roubini also known as “Dr.  Doom” stated in February 2009, the "Laissez-Faire capitalism failed."
• Roger Altman also said American-style capitalism "failed."
• As recently as June 2012, Jose Manuel Barroso, President of the European Commission stated the crisis crushing the continent did not originate in Europe, it originated in America.

Can America Carry the World?

For most Americans, the question of the country carrying the world is farfetched at best, insulting at its worse. But, that is the position the country may find itself, as the western nation is left with only a glimmer of life, even as we trudge through the worst post-recession recovery in history. Call it revenge of the Anglo-Saxons, but the United States and United Kingdom, (which is really rocking) are doing significantly better than their developed rival economies.

Along with America, India and China look solid, even if we cannot always trust the numbers from the latter.  Mexico and Canada are hot economies, too, and even Germany with its recent weakness is considered a growth economy. Having the largest economy in the Euro-Zone, Germany has a bigger stake, which continues to battle with the European Central Bank (ECB) over how to help other nations.  In reality, these nations must help themselves. The German finance minister noted last week that the problems in Europe could not be resolved by writing checks. Still, Germany has left the door open for "infrastructure" investments, which would be de facto check writing.

In the meantime, France's economy was stable at one time, however, it has gone from ratcheted to negative, and now the United Kingdom is poised to pass its rival and become the second-largest economy in Europe. Problems for France include:

• Bloated public sector
• High state spending (57% of GDP)
• High taxes (top rate 75%)

There was a suggestion of increasing the workweek from 35 hours, but the public sector union squashed that immediately. Higher taxes have sent great talent rushing out of France and often to Britain, while rigid employment policies are keeping young people of all skills out of the workforce. This brings us to the most important comment of last week, and maybe the year from the (ECB) President, Mario Draghi: "Reform must come before recovery."

What this means is that you cannot print and borrow to prosperity, while holding back an economy with dumb Draconian regulations that rely too much on government picking winners and losers. This matters in Europe and America, because it is the issue of the moment. (Big government and the welfare state versus free market capitalism).

Mid-term elections in the United States look like a referendum on the economy, and it is not living up to its potential. High polling numbers for a few independent voters might spoil the GOP chances of taking the Senate, but there is no doubt that Americans are frustrated with how Democrats have handled the economy.

 “Everywhere, as the conference drew near, men were enquiring about this possible new leader for them. Is this at last the Messiah we seek, or shall we look for another?"

-H.G. Wells

On the eve of an important economic summit in London, 1933, H.G. Wells wrote about the notion that Franklin Delano Roosevelt would be the world's “Messiah.” In 2008, American voters were dealing with the same situation and ushered in the presidency of Barack Obama. His first term was a disaster in all categories of economies, but he still campaigned against Anglo- Saxon policies; the memories were fresh enough in the minds of many when he won again- by a wider margin than the first time. This mid-term election sees no GOP figure talking loud and proud about Anglo-Saxon economics, or even rattling cages on any subject content, or allowing frustration to be the main selling point next month. Taking control of the Senate would get America back to its economic roots and Americans closer to economic prosperity.  The powers of Europe already know this, and while few will publicly concede, Europe can only save itself with pro-business policies and less government welfare.

There has to be a politician who can articulate to the man whose job it is to print money, it is cautioning.  America's "reforms" have only made it harder to get loans to own homes and start businesses. Higher taxes have only caused people and businesses to hoard cash, and the new healthcare law is creating a nation of part-time workers. It is time to unleash the economy that has proven, even with shackles, it is something to behold- just imagine how quickly we could turn it around.

Today’s Session

Equity futures have been trading in a very tight range all morning, however, most European markets climbed off the canvass into positive territory. The big news out of China is that its exports are up 15.3% and its imports are up 7.0%, both readings are well above consensus. Imports were helped big time by the iPhone and the growing US economy while exports were driven by a spike in the demand for iron ore.

China September Trade
Exports 15.3% Estimate 11.8	Imports 7.0% Estimate 2.7%

The market is oversold short-term, but could go lower. This does mean that we should zero in on opportunities because continued weakness will not be based on fundamentals. I’m looking at semiconductors which were thrown under a bus by the warning from MCHP - the hot new names are going to come back strong, (we closed Avago Technologies (AVGO) and Skyworks Solutions (SWKS) before the swoon, so we’re anxious to buy on the dip). Rails are oversold. Keep an eye on CSX Corp (CSX) which reports after the close tomorrow, but there is also scuttlebutt about a potential takeover. On that note, with crude oil still in free fall, energy stocks are still vulnerable, but from a value point of view, they are screaming to be bought, however there is just no urgency today.

Right now it’s about making it through today’s session.

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