9/11/2013 2:45 PM ET|
Cheap money or not, the Fed can't win
Whether the Federal Reserve decides to ‘taper’ its money-printing on Sept. 18 or wait until later, the market will take a hit. It’s best to watch from the sidelines.
With the threat of an airstrike on Syria diminishing, investors are preoccupied by the next great market catalyst: The Federal Reserve's big announcement on Sept. 18.
Everyone wants to know whether or not Bernanke and company will pull back on the money printing -- tapering, to use the Wall Street term, the $85 billion-a-month bond-purchase program that started last September.
This stimulus program is the third round of quantitative easing we've seen since 2008. And like the end of the first two rounds, it's being treated like a life-or-death decision by the cheap-money junkies on Wall Street. Seriously. Life or death.
Yes, this stimulus helped us get through rough patches, including the European debt crisis, the so-called fiscal cliff debate in Washington at the end of last year and the sequester budget cutbacks. Those have given way to some very positive signs of economic reacceleration, especially in manufacturing.
But regular folks could be forgiven for wondering why the taper would have to happen now. Job growth has slowed, as the labor participation rates plummets. Housing has cooled, as interest rates have soared back to early 2011 levels on expectations of Fed tapering. Inflation is relatively benign right now. And we've got another budget battle brewing in Washington.
With expectations all over the map, the Fed has done a terrible job of managing sentiment heading into its announcement. That raises the risk of a negative market reaction that could rattle confidence and short-circuit the improvement we've seen. But efforts to ease the pain might set us up for big problems down the road.
Here's a look at the situation and what investors need to look out for.
The most immediate problem with all this right now -- setting aside the broader discussions of whether the Fed should be playing such a prominent role in the economy and the markets, as well as whether it kept monetary policy too loose for too long -- is that since Chairman Ben Bernanke first started dropping hints about a taper in May, the messaging has been muddled.
That's created a will-they-or-won't-they guessing game of financial uncertainty. Investors and traders have scoured every Fed policy statement and every set of meeting minutes released by the Fed since then, looking for any morsel of information that could clarify the outlook.
It hasn't helped that the economic data has been a little uneven, with strong purchasing manager reports (globally, not just here at home) but soft data on payrolls (labor participation down to 1978 levels as people leave the workforce) and new home sales (down to October 2012 levels).
The basic idea is that improving data will lead to tapering, while weak data will not -- which in a sense makes bad news good on Wall Street and good news bad.
And while, overall, Wall Street expects a taper of $10 billion next week and an outright end to stimulus next June, there is wide variation around the numbers and timing. For example, Bank of America Merrill Lynch analysts don't expect any action by the Fed next week, believing instead that action will wait until the Fed's October meeting, and maybe until December. Yet Societe Generale not only expects a September taper but believes QE3 will wrap up as early as March.
Credit Suisse has an interesting outlook, penciling in a $20 billion cut to the bond-buying program. That's double the consensus estimate, which they think is necessary given less Treasury bond issuance (due to smaller federal deficits) and fewer mortgage originations (as the refinancing boom ends). With less supply, the Fed's demand for these bonds risks distorting the Treasury and mortgage bond markets.
But they also don't believe the taper will be on cruise control. Instead, they're looking for Bernanke to emphasize at the post-announcement press conference that taper decisions are data-dependent and that the $20 billion taper might be the only one for a while -- diminishing expectations of additional cuts later this year.
Given the wide range of expected outcomes, many are sure to be taken by surprise. Most of all, regular working folks still struggling in this economy.
That's because while the unemployment rate recently fell to 7.3%, its lowest level since December 2008, the decline was driven by a 312,000-worker contraction in the labor force.
That left just 58.6% of the population officially in a job. The quality of new jobs continues to be low, as it has since the recession ended in 2009. UBS economist Maury Harris notes that recent job growth has been faster in low-wage positions than in high-wage ones on a scale not seen since 2010.
Overall, the economy added 169,000 jobs last month, bringing the six-month average monthly gain to just 160,000. Given that we're still 1.9 million jobs from the prerecession employment peak (and even more when we adjust for the growth in the population), it'll be a long climb back at the current rate.
Now, the numbers shouldn't be like this.
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We have inflation. It comes in the form of a 2lb jar of peanut butter that doesn't weigh 2 lbs any more. Or the stats saying you don't need that extra lean ground round. Pink slime will do. The only place the
Fed seems to look is at wages, and we certainly DON'T have inflation there. Just a populace headed for heartache.This type of under reporting and prestidigitation is nothing more than a cruel joke on the masses.There are some here that need a dirt nap.Or better yet lets bring back tar and feathers.
I personally feel that the purchasing managers report has little correlation with employment. The "human input" component of our GDP is being reduced as fast as companies can manage to do it and that is not going to reverse. Companies used the poor economy to get rid of a lot of people making living wages and replace them with lower paid, younger, or part timers. Any job that requires new hires will be shipped overseas until the wages here ( and other associated labor costs) reach the level of China or India. I attended a local job fair recently and there were "some" manufacturing companies looking for people but the starting pay was less than I was paid coming out of high school in the 70's. Adjusted for inflation, I suppose you would be paying the company to work there. While I admire those companies trying to make a go of it here in the US, I can't see how anyone could survive on what those jobs pay. The US cost of living is entirely out of whack with the new incomes. The Fed's actions have managed to inflate that cost of living side of the equation but they have done nothing for the income side. They want housing to average $500k but the average wage only supports a $30K house. There's a huge disconnect.
Our country has been living off of speculation for 20 years and it has caught up with us. and yes Tony, the Fed can't win. They can only postpone losing. That's all they have been doing since 2008.
This article assumes that Fed Policy (aka money printing) is somehow correlated with or possibly even a driver of job growth.
Maybe another PhD would help.
Fail that idea too.
THE BAND-AID IS ABOUT TO COME OFF:
Don't be fooled by all the hype Investment Brokers are trying to sell you on investing.
Warren Buffett- is selling stocks as fast as he can.
Willian Ackman: J.C.Penny's largerst investor selling 39.1 million shares of stock
Hubert Joly: CEO of Best Buy selling 350,467 shares of his stock in the company
Harley-Davidson CEO selling 11,104 shares
Trulia (NASDAQ:TRLA) CEO sell 10,400 shares of stock
Anathony Mongeluzo owner of Pro Computer Service pulled $380 BILLION from U.S. Stock fund.
Public, Private Pension Funds, Investment brokerage, and State and Local Government have sold a total of $861 BILLION more then they bought from the market. Foreigners have sold $16 BILLION in 12 Months through Sept.
THE only buyers on the market are Companies who have bought over $656 BILLION Dollars of their own stock...WHY??
"In order to make the stock market look appealing to the average investor".
THE BARN'S BURNING AND IT's TIME TO GET OUT....17 trillion in debt and growing.....
Very good article really.
"there are really no good options here"
Excellent observation which really sums things up. I agree with Tony. Go to cash, then go out for a nice steak dinner and ignore the economic news for a while.
The Fed is run by Wall Street, and Wall Street always wins. I hope we've all figured that out by now. It doesn't matter if markets rise or fall, they always make money on the action. As explained in the dialogue of the movie classic “Trading Places”
“The good part William is that, no matter whether our clients make money or lose money, Duke and Duke get the commissions.”
“Well, what do you think Valentine?”
“Sounds to me like you guys are like a couple of bookies.”
“[You see Mortimer] I told you he would understand.”
"... pass the Gray Poupon."
According to Deutsch Bank, held bonds are shrinking in potential value with fewer and fewer potential redemption options. Several REAL experts are indicating a flight away from fixed income vessels because [they are dead]. When you consider bonds as the underlayment and their flush or make-profit redemption potential compromised, you can easily see that stocks will be denied liquidation because there isn't anything to redeem them with either. You watched a video game rack up tokens and called it wealth, but the undeniable fact is-- the financial sector was broke when QE started and went in the hole losing to greed that didn't trickle what was supposed to be-- currency. You talk Fat, but you're really a MF, Cat. And broke. The threshold redemption fell below 97 cents quite a while ago... based on interventions (debt instruments and derivatives) premiums could fall below 12 cents IF you are due anything at all. Law Biz could absorb that easily and will pursue it because they are the customers who will tank the most as it is. You ain't got squat.
nice post hava. with bernanke AND a goodly number of governors leaving the fed, they will want to pin down a legacy of removal of this intervention that has outlived its usefulness, so we (and our purchased research) believes the tapering will be heavier than the consensus estimates (and thus we are underweight gold, reits, and bonds). although invested, we have one foot out the door ....
we'll see soon enough ...
the rich are responsible for the home purchases and the rising values.most homes are being paid cash for.the rich now get the largest percentage of all income they have ever gotten.even more then before the great depression. The government is responding to only the wealthies needs and wants.high wage jobs are being outsourced making the rich ever more wealthy.every proponent of the rich i.e. the cato institute and the heritage foundations main objective is perpetuating free trade/the decline of labor.
for those of you that havent been paying attention we are in a life and death struggle against the one percent. They declared war against working americans.they bought our government and they have propaganda arms extolling the policies necessary for the continuing ruin of america.one former congresswoman said it best. When both parties agree on something i assure you it isn't good for anyone but the wealthy
Stagflation for the next few years.
A choice of either severe austerity or hyperinflation after that.
America needs a miracle or real, sustainable growth (not the brand of reported growth which is the result of manipulated GDP/GNP paired with minimised chained CPI ) .
"The OTC derivatives reform effort fits in very well with the broader reform agenda, but there are significant risks that we will fall short in this arena relative to what we are likely to achieve elsewhere," he said in prepared remarks to a derivatives conference in Paris. Dudley, whose branch of the Fed directly oversees Wall Street, acknowledged that swaps rules are more difficult to implement than bank-capital rules, for example. But as it stands, he said, the Fed and other regulators cannot determine the amount of risk that remains in the system, or how secure is its infrastructure."
I wanted to post this for all readers who are tired of MF Cat trashing my posts. JUST the US share of derivative exposure is $630 TRILLION now. Globe wide... paper & electronic currencies, debt instruments and derivatives FAR EXCEED $1 quadrillion now. We haven't had an economy in at least 5 years and without one, we cra**** a guaranteed inevitability. For the narrow and closed minded... derivatives have never been reconciled, so they very well contain fake and dark pooled money. Derivatives PRIORITIZE ahead of stocks, bonds and secured positions. If you haven't grasped what I've been saying since 2009... YOU have nothing... nada... stocks cannot liquidate- the bonds for redemption are worthless and everything else including real estate and metals isn't worth anything without viable currency. Sell now FOOLS... better to drive a burning car into the river than to go crispy while it is artificially forced to continue down the road.
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[BRIEFING.COM] S&P futures vs fair value: -9.10. Nasdaq futures vs fair value: -19.50. U.S. equity futures trade sharply lower amid cautions action overseas. The S&P 500 futures trade nine points below fair value with some volatility expected around 8:30 ET when the Nonfarm Payrolls report crosses the wires. The Briefing.com consensus expects the report to reveal the addition of 220,000 payrolls in July.
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