Published on Sunday, August 26th 2012

Dear Reader, On November 6th, the United States will hold its presidential elections. As that day draws nearer, partisan disagreement (perpetual as it may be) will become increasingly amplified. As always, the two major political parties will describe the state of the economy (and the ideal course of economic policy) with the usual predictable bias, but with more intensity as they try to win votes. When two sides present opposing views, and each of them is equally self serving, it is difficult to give either side any credibility. Yet in the case of economic data and analysis, both sides need unbiased information, as they both have a part in running the country -- together they make up Congress (which is called Parliament in most other developed nations). This is exactly why the CBO (Congressional Budget Office) was created in 1974. Its job is to provide non-partisan, unbiased economic data to Congress. On Wednesday, the CBO presented its updated economic outlook for the next ten years (2012-2022). The full text can be read here: http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf, and the verbal presentation of it (by Doug Elmendorf, the head of the CBO) can be watched on this video: http://www.c-spanvideo.org/program/BudgetandEconomicOutlook9. Mr. Elmendorf warned that the US is on track to see a significant recession in 2013, with the unemployment rate getting worse than it currently is. But investors are counting on the upcoming Fed meeting at Jackson Hole, Wyoming to prevent that from happening. The locals in Jackson Hole will tell you that the area was originally named Jackson's Hole after a fur trapper called Davey Jackson in 1829. To enter it (it's a valley), early settlers walked downward from steep mountain slopes, which you can imagine feels like walking into a hole. Today, Jackson Hole is a tourism hotspot, attracting millions of tourists to nearby national parks (reserves) and ski resorts. And every year since 1978, the central bank of the United States (the Federal Reserve), has met in Jackson Hole. This year they meet on Friday, August 31st. When they convene and announce their position, investors will be looking for Ben Bernanke (chairman of the Federal Reserve) to suggest that a third round of quantitative easing may be undertaken. Since the first two rounds of quantitative easing in the United States, unemployment is still a major problem. US unemployment is currently 8.3%, compared to 4.4% before the 2007 mortgage crisis morphed into the 2008 financial crisis. The economy is described (by economists, analysts, and even the Federal Reserve) as sluggish, weak, and fragile. But this is all short term data over the last few years. In the long term, will more quantitative easing help? Nobody knows the long term future for certain, but we can look at the long term past. In 1989, the world's second largest economy at the time (Japan) experienced its own asset bubble implosion. The conditions leading up to it were strikingly similar to the housing and credit bubble that imploded in most of the developed world in 2008. It is now 23 years later, and Japan has undertaken 23 years of quantitative easing. How has it fared in the long term? Today, Japan's unemployment rate is twice as high as it was before the 1989 implosion. Its economy is described as sluggish, weak, and fragile. After 23 years, quantitative easing has not fully restored Japan's 1989 employment levels, or its 1989 economic might. And Japan's stock market? Well, here it is from January 1970 to present (Friday's close). Japan is a long way from Wyoming. But if Davey Jackson were alive today and took one look at that giant hole in the Japanese stock market, he'd probably just walk away. Unfortunately though, the investment community wants to walk right into it.

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