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I respectfully do not agree with his prescription to ‘protect our economic future.’

“I welcome the President’s acknowledgement of the economic pain felt widely and deeply and look forward to reviewing his plans to help middle class Americans, who are still hurting economically. We must enable Americans to find and keep good jobs with fair pay. And, to protect our economic future, we need vigorous, sustained fiscal discipline that enables deficit cutting.”

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The circumstantial evidence builds that there’s already an inflation problem, politically, probably due to those up and coming kids with the western educations at the finest schools pestering their elders about it.

And, if so, when foreign direct investment loses its profitability due to rising domestic costs, the currency fundamentals could work to drive it lower, taking away the presumed option of reducing the cost of imports by letting it float higher.

An early warning might be a shrinking of the size of the premium in the currency forwards.

It seems possible that Chinese officials could allows their currency to strengthen in the first two weeks of Feb prior to the beginning of the Chinese New Year holidays. If there is one thing that Chinese officials fear the most it is inflation – inflation is the only thing that can touch everyone in China and continued low inflation is the best way to prevent social unrest. Clearly they are looking to any way they can to tighten financial conditions and stronger fx would be one component. It is interesting that recent press reports stated that Chinese officials wanted to call back January loans made to recent borrowers, possibly reducing the windfall speculative borrowers would get in a one time revaluation.

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The speech made it clear there has been a shift to ‘fiscal responsibility’ with plans to pay back the 2 trillion in new debt, all well down the road. The spending freeze will pay half of it over time, and the rest from less specified sources that included tax increases for people making over 250,000, banks, etc. The health care plan is also supposed to reduce the deficit and paygo may be back.

And no additional fiscal relaxation of consequence apart from the current jobs bill working its way through congress.

The jobs initiatives mentioned were minor.

And rather than come up with a way for congressman inherently uncooperative due to the current institutional structure, there was simply a call for them to somehow act in the public interest.

So it looks like the economy is on its own for the most part, with an agonizingly slow and irregular recovery, and neither side coming up with substantially better ideas.

This isn’t a bad environment for stocks, as there’s nothing to suggest negative earnings shocks, and productivity gains can keep supporting at least modest earnings growth, and high unemployment helps keep down costs, and helps keep interest rates low which helps valuations.

The announced export push would be a negative for our standard of living and real terms of trade, but pretty good for stocks as well.

And clearly there’s nothing more the Fed can do, as it’s becoming increasingly clear the moves they have already made have had no positive impact on aggregate demand. They have only restored ‘market functioning.’

Removing some of their liquidity measures does mean there’s again a chance the pressures will appear in libor settings if something starts shaking the tree.

Like Greece, or Iran, or something like that.

Each time the President speaks I’m hoping for some meaningful new ideas but have yet to hear any.

But, again, not a bad environment for stocks, and interest rate forwards continue to look reasonably cheap as well, particularly as concerns about QE and 0 rates as causes of inflation subside.

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