-Alexis de Tocqueville

I have my doubts that Texas Governor Rick Perry has ever read Alexis de Tocqueville. This is not to say that he is not an intelligent and well-read person, but he just doesn’t strike me as a person who really cares what a Frenchman wrote about America over 150 years ago. Regardless, de Tocqueville and Perry certainly share common ground on their suspicion of government.

In his kick off speech this past weekend, Perry went directly to the heart of his view on government:

“That’s why we reject this President’s unbridled fixation on taking more money out of the wallets and pocketbooks of American families and employers and giving it to the central government. ‘Spreading the wealth’ punishes success while setting America on a course to greater dependence on government.”

The cavalier cowboy has rattled the left only a few days into his campaign. Meanwhile over on the political right, if his competitors haven’t shown they are rattled publicly, they will soon. A recent Rasmussen poll shows Perry with 29% support for the Republican nomination, Romney at 18%, and Bachman running a distant third at 13%. As they say in Texas: Yeee-haw!

Clearly, Perry is experiencing a post-announcement bump in popularity and his poll numbers are likely to come down over the coming days. On the other hand, if the first few days are any indication of the campaign Perry will run, his rhetoric is more than likely set to accelerate.

Perry has proven himself to very quotable early into his entrance into the campaign. His most notable quote was a not-so-guised criticism of the Federal Reserve and Chairman Ben Bernanke. Actually, forget guised critique, the cowboy from Paint Creek, Texas took a double barreled shotgun to the Fed with the following statement at a campaign event in Iowa:

“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in history is almost treasonous in my opinion.”

Perry could have chosen his words more carefully, but the interesting takeaway is that he is currently the front runner in the Republican field, could realistically become President, and has in one of his earliest campaign appearances taken a direct shot at the Federal Reserve. Historically, a critique of the Federal Reserve has been left to the devices of more fringe candidates (enter Ron Paul), as the Fed has become an accepted institution in America. Not so anymore.

Whether the nature and organization of the Federal Reserve truly becomes a central campaign issue over the next 18+ months is yet to be seen, but if it does Americans should welcome it. With the proliferation of Keynesian economists in America over the last eighty years, the majority of Americans have largely accepted the role of the Federal Reserve in their economy despite the contra voices of economists such as Milton Friedman.

In Friedman’s classic, “Money Mischief: Episodes in Monetary History”, he wrote about the Fed:

“I have observed that non-economists find it almost impossible to believe that twelve people out of nineteen – none of whom have been elected by the public – sitting around a table in a magnificent Greek temple on Constitution Avenue in Washington have the awesome legal power to double or halve the total quantity of money in the system in the country.”

After both an extended and continued period of the lowest interest rates in U.S. history and two rounds of quantitative easing, monetary stimulus over the past two years have been largely ineffectual in promoting the Fed’s dual mandate of lowering unemployment and creating price stability. In fact, the only real growth we’ve seen is in the size of the Fed’s balance sheet. Time will tell whether Perry will have the staying power to win the Presidency, but in mainstreaming questions about the Fed, even if poorly worded, he is already doing a service to the country.

The other role that Perry will likely play is as a headwind to incremental monetary easing. Our view currently is that the Fed will not implement another round of quantitative easing until we see at least three months of negative employment data, which places the potential timing for incremental easing into late 2011, at best. Perry’s heightened rhetoric will only increase both scrutiny of the Fed and questions by certain Fed Governors of the real benefit of incremental easing, which could serve to lengthen the time frame on implementation of additional easing.

As the Fed continues to play the wait and see game related to lagging economic indicators, back in the market economy data continues to deteriorate. Specifically, the high yield market has had it worst month in over twenty years. High yield yields have backed up by more than 9% over the last thirty days and were up more than 14% at their peak.

In the chart below, we emphasize this point by showing an index of credit default swaps on high yield bonds over the last year. Credit default swaps on high yield bonds are now at yearly highs and are up more than 30% in the last thirty days. Given that the Fed has explicitly stated that interest rates will not increase well into 2013, it is not interest rate risk the high yield market is signaling.

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