In the late nineteenth century, public health in Chicago was suffering. The city’s industrial waste and sewage from its upstream neighbors was befouling the Chicago River, and a disgusted populace blamed it for outbreaks of typhoid and other forms of pestilence. City leaders, under pressure to “do something,” eventually conceived of an audacious idea: Why not reverse the course of the “stinking river” and send the polluted waters downstream to the Mississippi? As unthinkable as that proposal sounds to modern ears, in those days no one had even conceived of an environmental impact study and upstream towns along the river turned out to be no match for big city political power. The Army Corps of Engineers was engaged to build the Chicago Sanitary and Ship Canal, in what was then the largest earth moving effort in North American history. On January 17, 1900, the locks of the canal were opened and water began to flow from Lake Michigan downstream towards New Orleans. The filth had become someone else’s problem.
The Fed has been busily at work on an excavation project of its own in recent weeks and it appears that the central bank’s lowering of interest rate levels is beginning to reverse the river of money that has been flowing out of the stock market. Long-term mutual funds reported net outflows for 23 consecutive weeks from May to mid-October of this year, but those flows have finally reversed as investors position themselves for a second round of quantitative easing. The Fed has confirmed that QE2 will inject $75 billion worth of liquidity each month between now and next June. While that action will undoubtedly float the boat of American equities, much of that liquidity will flow to emerging markets overseas, carrying inflationary pressures along with the current. But that, too, will become someone else’s problem.
Depending on your viewpoint, either all of this is a wise and brave policy response, or the Fed is easing on down the road of Zimbabwean hyperinflation. In either case the weakening effect on the dollar should lift short-term earnings prospects for American exporters. The positive market response should spur consumer spending via the wealth effect. Mr. Bernanke appears to have achieved much of his goal before even spending a single freshly printed dollar. Worries that global central banks will react with easing measures of their own have largely proven to be unfounded, offering relief to traders concerned about the outbreak of a global currency war, and inflationary fears have been counterbalanced by the realization that the flood tide that swept dozens of newly elected Republicans into office has effectively ended the prospect of further fiscal stimulus and ballooning federal deficits.
Political rivers are rarely reversed as dramatically as they were in this year’s midterm elections. President Obama’s sudden indication that he may be willing to extend the Bush tax cuts for all earners may be intended as a signal that cooperation is now on the agenda, but traders should take conciliatory statements by surviving Congressional Democrats with a grain of salt since it is certain that once the period of post-election self-flagellation passes, parliamentary barriers will once more be put in place. Needed legislation will fail to pass, but that will be the American people’s problem.
Gridlock is probably in the cards, since both parties are certain to be digging in for 2012, but investors should be mindful that if economic recovery takes hold between now and then, a political re-reversal cannot be ruled out. As strange as that phrase sounds, re-reversals do happen. Even the mighty Chicago River, proclaimed as one of the great engineering efforts of its age, may be re-engineered. An invasion of non-native Asian carp has moved up the Mississippi basin, in the process threatening to upset the ecosystem of America’s rivers and lakes. For now an electrified barrier lies between the carp and the lake, but a serious proposal has been advanced to re-reverse the river, sever it from the Big Muddy and isolate Lake Michigan from the voracious fish. Although it’s ironic that environmental concerns may slow the project, it’s nice to know that local officials are finally considering the long term impact of today’s actions. Is it too much to ask for our national leaders to do the same?
Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.