This blog post originally appeared on RealMoney Silver on Oct. 25 at 8:07 a.m. EDT.
-- Carly Simon, "Anticipation" The countdown begins as the dual impact of the results of the November midterm election and the scope of the Fed's QE 2 announcement make the next week an interesting market setup. In the political arena, the stakes loom large. The Democrats appear to be headed toward a House loss, but the Senate majority remains in the balance and probably won't be determined until the wee hours of the morning. As I have previously written, after spending like drunken sailors during the Bush administration, Republican legislators have acknowledged that it will block even the most sensible stimulus programs, and the Democratic administration and its legislators have lost the will to fight their adversaries. As a result, the responsibility for turning around the domestic economy now lies squarely on the shoulders of the Fed. So, on the monetary front, the stakes, too, loom large. While some internal Fed discord appears present, I expect the QE 2 arsenal to be something slightly more meaningful than the consensus $500 billion over six months. And, almost more significant than the results, will be the market's reaction to the news. Political Will the market greet gridlock favorably as it has historically? Or will investors conclude that in light of the profound local, state and federal fiscal imbalances and other challenges that we face, solutions, not gridlock, are in order? Will the administration move toward the center in an attempt to reach agreement on fiscal policy? How strong a role will the Tea Party play in the GOP as we move closer to the Presidential election in 2012? Monetary The bulls argue that "these are the good old days." They opine that QE 2 will stimulate domestic economic growth and that the risks and costs associated with further easing are justified in light of the risks of deflation and the current elevated unemployment rate. They further argue that more easing is better than nothing and that the bubble risks are outside a relevant investment time horizon. The bears argue that we are just "chasing after some finer day." They suggest, as I do, that QE 2's ultimate efficacy should be questioned, that the unintended consequences and costs (i.e., screwflation) might be considerable and that the current stall speed of growth, with limited impact/influence from QE 2, exposes the U.S. economy to policy errors and/or an unexpected jolt to the system. Purposeful and transformative fiscal and tax remedies would trump more easing, the ursine crowd suggests. As a consequence of policy, the savers' class is being penalized, and sectors of our economy are getting hooked on unprecedented low interest rates as we await another Fed bubble. 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