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Back in the olden days (i.e. just a couple years ago!), things like earnings and the state of the economy actually mattered.
The warnings of lousy sales, and earnings and growth trends we got from companies like Intel (INTC) or FedEx (FDX) last week would’ve knocked stocks for a serious loop. Then this week’s warnings from the likes of Texas Instruments (TXN) in tech and Burberry (BURBY) in retail, would’ve done even more damage.
But the fact is, the markets are now completely hostage to the latest proclamations and decisions of bureaucrats and central bankers. So in my best effort to “follow the money,” I want to talk turkey about this week’s Federal Reserve meeting — and share a surprising conclusion!
The Latest News from the
“Oracles” at the Fed
The Fed just concluded a two-day policy meeting, one which was followed by a press conference from Fed Chairman Ben Bernanke. Investors went into the meeting anticipating a massive new dose of quantitative easing (QE).
So what happened?
The Fed said it would print $40 billion in new money per month and buy mortgage backed securities (MBS) with the dough. It also said it would continue its Operation Twist program, whereby the Fed is selling short-term securities and buying longer-term Treasuries at a pace of about $45 billion per month.
The Fed added that it would continually evaluate the purchase program over time, and see if it needs to be ramped up. Finally, the Fed said it would keep rates at “exceptionally low levels” through “at least mid-2015.” That’s an extension from the current 2014 timeframe.
But Difference from
Past Bouts of QE Is Key!
Unlike the last few times the Fed decided to try to solve all the world’s problems by burying them in greenbacks, this latest bout of QE is different. It’s NOT coming at a time when inflation expectations are falling. It’s NOT coming at a time when stocks and commodities are plunging. It’s NOT coming at a time when fear is running rampant.
For instance, QE1, QE2, Operation Twist and so on were all launched when five-year forward inflation expectations were low and falling. Or in plain English, trading in certain bond market instruments suggested expectations about inflation rates down the road were waning.
Investors were pricing in future inflation of just 2 percent when QE1 was launched in November 2008 and 2.2 percent in August 2010, when Bernanke strongly hinted at the launch of QE2. That compares to 2.6 percent now. Plus, producer prices just jumped 1.7 percent in August, the biggest monthly surge in three years!
The Dow Jones Industrial Average, for its part, was trading for just 8,300 when QE1 was rolled out and around 10,000 at the time of QE2. This week it traded to almost 13,400, a level we last saw in December 2007.
West Texas Intermediate crude oil is going for around $98, for its part, while retail gasoline prices are hovering around $4 per gallon. Corn just hit a record high of $8.43 per bushel, while soybeans just hit an all-time high of almost $18 per bushel. And fear and uncertainty, as measured by the CBOE’s VIX index? It’s the lowest in around five years.
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| More QE is bound to send sell orders soaring through the roof! |
So what is my surprising conclusion?
That the market has already FRONT RUN THE FED! Investors have already priced in every last drop of cheap QE money. If you follow that thesis to its logical end, you can only conclude that the market is now due for the mother of all “sell the news” reactions. That isn’t just my conclusion either; I’m seeing a handful of other firms come to the same verdict!
My prescription, therefore, remains the same: Maintain broad hedges against risk, while seeking opportunity in a few select names that can prosper in almost any market environment. That’s especially important now with the massive fiscal cliff problems looming.
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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BULLS ON PARADE!!!! BULLS ON PARADE!!!!
http://www.youtube.com/watch?v=eQUdVZetaFE
My long term gold and silver holdings are rocking! My short term index calls and call spreads have been rocking! YEAH BABY! The defense contract I work on for the gov was renewed for another 3 years with pay raises built in every year (oh and since we have money left on the previous fiscal year’s contract I’m going to Hawaii all next week for the fifth time this year for a “meeting”)–YEAH BABY!
It’s Obama’s economic miracle! We should increase entitlements too, not decrease them like the Republicans want. Why should people have to pay for college or health care? Why don’t I get more vacation time like the Europeans? Why should I have to work at all (work is hard)? Grow the defense sector…don’t shrink it! We need more soldiers to defend our embassies and to invade every Muslim country in the world! It’s for national security by golly! Don’t you care about national security? Don’t you remember 9/11
Seriously though…
The market would have thrown a temper tantrum if he hadn’t given them what they wanted (same behavior occurred back when they were in rate cutting mode, and with TARP, and with etc.).
We would have sold off huge and probably within a matters of days (if not 24 hours) the Fed would probably have made a policy change.
Too bad more Americans don’t participate in the markets though. Too bad we all can’t bonus ourselves from paper gains made gambling on more risky mortgages, derivatives, equities, and commodities with other people’s money. Too bad the stock market does not reflect what is happening in real world. Right now the system rewards the speculator (the BULLS) and not the conservative savers (dead $) but we’re floating all boats again–so many market turds who just recently announced bad news are rising too. We all know how that goes. Honest CEOs will see their stocks punished and left behind. But it often becomes too tempting for other CEOs, not wanting to hurt their stock price to begin to use creative and off balance sheet accounting. This continues until the rot in the system is revealed by a normal market fluctuation (they are no longer able to keep the scheme going).
I think one ongoing risk to the central bankers’ scheme is IF they (Fed and ECB) are too successful in stoking animal spirits and too much of the “sideline” money in money markets (short term treasuries) and in bond funds pours into higher risk stock funds. The central bankers would have to print increasing amounts to cover the reduced demand for bonds. I think they would likely begin to withdraw liquidity in stages (or increase margin requirements) to “scare” some money back into bonds…otherwise they risk the initial bond “correction” turning into an all out crash with rates spiking.
Have you ever thought about adding a little bit more than just your articles? I mean, what you say is fundamental and all. But just imagine if you added some great images or videos to give your posts more, “pop”! Your content is excellent but with images and videos, this site could certainly be one of the most beneficial in its niche. Superb blog!