6/27/2013 5:00 PM ET|
Market already misses Bernanke
Amid rumors that the Fed chief is on the way out, Wall Street is scared of losing the support Bernanke has been supplying to stocks.
Why did just talking about an end to the Federal Reserve's program of buying $85 billion in Treasurys and mortgage-backed securities throw global markets into such chaos?
I don't think you need to invoke "feral hogs" or imagine conspiracies by the gnomes of wherever to explain the global sell-off. It's really quite simple.
Fed Chairman Ben Bernanke's May 22 answer to a question after his congressional testimony marked the end of the "Bernanke put." That put -- what the financial markets have seen as the guarantee that the Federal Reserve would support asset prices -- has been a key to this rally, which took the Standard & Poor's 500 Index ($INX) from 1,131 in September 2011 to 1,650 in May 2013.
Something, some guarantee from the world's central banks and, most importantly, the Fed, has replaced it. It's not like the Fed is about to abandon its support for the mortgage market, for example.
But right now, nobody knows what's in the fine print of that guarantee, how good the guarantee is or how long it runs.
"When in doubt, get out" will rule huge hunks of global financial markets until the MBAs who crunch the numbers at the world's big financial institutions feel they understand the new guarantee enough that they can plug it into their formulas.
How long will that take? More than the few days of this week's bounce -- especially because it's clear that the bankers at the Federal Reserve aren't certain themselves about the fine print on that guarantee.
I think it's likely to take most of the summer, at least, to work out a new consensus on the central bank guarantee that will replace the Bernanke put. And until that consensus is in place, I think we'll see levels of volatility high enough to keep markets on edge and turn minor disappointments, worries and bits of bad news into major moves to the downside.
Everything has tumbled
The key to understanding this drop is that pretty much everything has tumbled at the same time.
Since May 22, the day that Bernanke offhandedly reminded everyone that the Fed would have to turn off the cash faucet at some point, U.S. stocks, as measured by the S&P 500, were down by 5.8% as of the close on June 24.
The damage to stocks didn't stop at U.S. borders. Japan's Nikkei 225 Index was down 16.4% in that period, and China's Shanghai Composite Index fell 14.7%. Brazil's Bovespa declined by 16.4%.
And it wasn't limited to stocks. U.S. Treasurys, as measured by the Bloomberg U.S. Treasury Bond Index, fell 3.3% from the May 8 high to the close on June 24. (Bonds, in general, peaked slightly ahead of stocks.) U.S. corporate high-yield bonds, known affectionately as "junk bonds," were down 5.3% in the same period. Emerging-market corporate bonds fell 8.3%.
That speaks to a worldwide, all-asset-classes re-evaluation of risk.
Assumptions about risk govern all the formulas Wall Street uses to calculate the value of individual financial assets. A stock is worth what it is in Wall Street's calculations because Wall Street can assume a company's cost of capital, for example, and then plug that assumption into a valuation formula. A bond is worth what it is in Wall Street's calculations because Wall Street can assume a rate of inflation and the appreciation/depreciation of the bond's currency.
Assumptions about risk get more important as strategies get more complex. If you're laying off the risk of the Japanese yen in order to go long Japanese stocks, for example, you need to make assumptions about the "riskiness" of each asset class and about the relationship of the risks of these asset classes.
Wall Street's most successful thinkers remember that they've made these kinds of assumptions and they constantly check to see if the assumptions remain justified. When they no longer are, or when it's not certain that the assumptions still make sense, the smartest course is to sell -- and either figure out new assumptions from the sidelines or wait until the logic behind those assumptions is more convincing.
Let me use a current market puzzle as an example. The yield on AAA-rated general obligation municipal bonds has climbed to 4% from 3% a month ago. That means that a bond worth $1,000 a month ago is worth $750 today.
That's simply stunning. Here we have a 25% loss in the highest-rated, lowest-risk tax-exempt government bonds. Has there been a huge surge in default risk in the last month? Maybe in places like Illinois or Rhode Island, where state and local governments are in deep, deep trouble after promising to pay out more than the budget can afford for years and years. But those aren't the kind of bonds we're talking about here. Illinois isn't rated AAA.
So what's going on?
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Congress no longer represents the American people. To be elected to congress cost large amounts of money and vested interests supply this money, congressman are bought and paid for before they ever take office. Also, it is estimated that for every $1 spent by lobbyists there is a $2200 return on that dollar. The money is just too big. If you look at who benefits from our current economic policy it is the big banks, large corporations and the federal government and the vested interests they protect. Americans we are going to have to face this reality and deal with it. Sorry about that!! The big question is do we have what it takes to deal with this reality????
He's working on our dime
Let's see about this "working"
Milleia ? (Whatever)
Hundreds of slaves to serve and make secure
FOR WHAT ?
What is he doing in Africa ?
I really don't think the average tax payers gives a sheet about Africa or what he has to say about Mandela ?
100 Million thrown down the toilet so Obuma could look for Daddy and see a lion ?
Up and down market until late fall while they try to convince everybody the market has some intrinsic value beyond the sugar tit the fed has been feeding it. There are still some suckers left to fleece that are in denial.
The coming crash will make 08 look like a speed bump, we are about to crash and the corporate bought media can't talk any confidence back into this fantasy market.
'Wall Street is scared of losing the support Bernanke has been supplying to stocks.'
'support' aka stimuli after stimuli after more stimuli
oh! that's too funny!! translation: Wall St. is afraid that the money train is grindin' to a halt! should be the headline, at least that would speak to a truism instead of a fallacy in this insane, inane, whackedout illegal running rampant regime, an outlaw regime that you idiot guilty white azzholes voted for and now:
77% of Americans are living paycheck to paycheck, I mean that's an incredible, STAGGERING amount of people and a testament to the destructive democrapic party's agenda, outrageous that this party is even remotely existing, really, it's outrageous that Americans are tossing their freedoms away, right out the proverbial window, mindboggling that I'm actually living thru the demise of a great nation, it's happening right before my eyes, shocking really, the world is falling apart and what are idiots worried about?? gay marriage and abortion, 2 things we don't give A RATS RANCID RABID'S AZZ ABOUT!!! Americans need sustainable, Permanent JOBS! who cares about some homo gettin' hitched?? abortions?? late term abortions are what the democraps call great???? are you serious?? slicing and dicing a fully formed human being is what the democraps call a boon to woman's health issues, hehe my God this nation is so phucked even I can't describe it clearly enough, outrageous!! well as long as the abortions are liberal ones, I'm cool with it!! we don't need any more liberal vermin scurrying around this planet!
Care to challenge me on that ?
We should invest instead in some 4th world with a horrible work ethic, primitive, totally corrupt when we have everything we need right here ?
THIS is the demented , lefty douche bag brain.
We can't drill , mine here but it's perfectly OK to "rape" Africa's land , as long as they don't see it and they can make money on it ?
Typical phony, hypocritical, lefty, demented minds
Do what I say - NOT what I do
Listen, fool, Obuma is there for one reason and one reason only
This morning the stock go up 150 points. And now it dipped 130 points.
When it goes up this morning the report said that investers was confident with the Fed policy.
The economy data show that economy is strong and stable.
Then what is going on here with this sudden dropped?
We need a good, honest government official to speak out on this false economic manipulation.
Tell us the truth!
I told people you can't trust a "conservative " Latino. It doesn't exist.
At the end of the day , they always revert back to what the "people" need. By people they don't mean the average , working stiffs here in the USA , they mean the people overseas looking to squat here.
Grandma or third cousin, whatever.
Actions speak louder than words.
Vote that bum out
Whatever Africa's got we don't need or want. Trust me
What we should send billions to Nigeria , so they can educate us on the fine art of scamming the elderly, how to win the lottery , how to collect on someone's "estate" ?
What else they got going for them?
i don't see you challenging me that we have ALL the energy right here in the good old USA to last for 100 years. we don't need Africa , Venezuela or those heathens in the Middle East.
Go back to point one , you lost
The Obbammies are on YET another people paid vacation !
Only 100 million and everything is perfect here too !
Ben tested the waters with his comments and found the water quite hot indeed. Now everyone is stepping in and saying he really didn't mean what he said and implying that they will print money forever. We all know that can't happen without dire consequences. Rather, they will continue to print until all the fat cat institutions have solidified their positions so they can survive the market meltdown that will occur when the stimulus is ultimately withdrawn. It will start to "peter out" well before anyone in the general public is made aware of it's timing. It's the way of things.
In the meantime, if you think you are lucky enough to anticipate what the big boys are going to do, you can make some money for a short while. Just keep in mind that none of this "prosperity" is being generated by any real economic activity but is simply the powers-that-be redistributing the wealth before the rest of us slip back into the 1920's.
None of the old investing rules apply anymore.
Yes, that's the average Americans biggest concern-- Is China carving up Africa ?
BTW, are you actually saying that is WHY The Obumas are in Africa on our dime ?
NOT the 750 MILLION stolen in welfare fraud every year
NOT the 250,000 deadbeats that go on "disability" every month - 14 million per year
Not the long term unemployed who've been on the dole for 2 years or more ?
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