10/21/2013 7:15 PM ET|
Welcome to the 'Dirty Harry' market
The Fed is no more out of ammo than Clint Eastwood in his prime. And with the economy looking shaky, don't bet that it will pull back on stimulus anytime soon.
As I look at the U.S. and global financial markets right now, I keep thinking of that iconic scene in “Dirty Harry.”
Clint Eastwood is facing a piece of urban pond scum whose own gun is on the ground but within reach. Eastwood has got him dead in his sights, but after a running gun battle, he could be out of ammunition.
“I know what you're thinking,” says Eastwood’s detective Harry Callahan. "‘Did he fire six shots or only five?’ Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you've got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”
Investors face a similar situation now as we try to decide if the Fed is out of the ammunition it has used to prop up the economy.
You recall the scene. The punk decides Harry’s gun is empty, reaches for his own and winds up floating face down in the midst of a spreading patch of bloody water.
While not wanting to suggest that either you or I are equivalent to Dirty Harry’s punk, I do think Eastwood’s question is appropriate for us now.
The Federal Reserve, the People’s Bank, the European Central Bank, the Bank of Japan and other of the world’s central banks have fired a lot of ammunition -- first, to head off banking system meltdowns, and second, to try to stimulate their economies into sustainable growth. Global financial markets rallied on that action with some stock markets -- the U.S. and German markets, for example -- moving up to all-time highs and already low bond yields falling even lower as bond prices moved up.
Now, with global growth rates nothing to write Sister Sara about, with politicians in Washington D.C. about to begin another round of budget negotiations that may make “Riot in Cell Block 11” look like a shining beacon of good faith, and with some economies showing all the emotional bounce of the pod people in “Invasion of the Body Snatchers” (to continue and conclude this post’s Don Siegel homage), financial markets are rallying again on hope that the central banks have more bullets left in their gun.
Well, do you feel lucky? And if you do, for how long?
It's a gambler's market
Let’s be clear, I hate investing when it resembles gambling. I like markets with clear macro trends behind them, such as the falling yields that characterized the bond markets since the early 1980s. (That trend is over now.) And I like markets without trends and where the fundamentals drive individual stocks.
But I really dislike markets where the direction of macro trends is up for grabs; where traders and investors are trying to bet that that they can guess the results of an essentially binary decision; and where the results of that binary decision -- in the latest case, a taper/no taper decision by the Federal Reserve -- will drive most drive stock prices in one direction or another, overwhelming the fundamentals of the vast majority of individual stocks.
That’s exactly where we are right now.
Which is almost certainly good news through November and into December. After that, though, I’ve got to wonder how lucky we’ll be and for how long.
The economy may be tapering
The consensus opinion on Wall Street at the moment is that the Federal Reserve’s Open Market Committee, the group that will decide when the central bank will start to cut back on its current $85 billion in monthly purchases of Treasurys and mortgage-backed securities, won’t start the taper at its Oct. 30 meeting. The thinking is that the Fed won’t have enough data on the economy to decide if U.S. growth is strong enough to stand up to a withdrawal of some of those purchases. It’s not the direct effect on the economy of cutting purchases to $70 billion or $75 billion a month that concerns the Fed, but the effect of any follow-on increase in interest rates and the potential that higher rates might slow sales in sectors of the economy, such as housing and autos, that rely on financing.
Since there is no Fed meeting in November, the earliest that the Open Market Committee could begin a taper of the Fed’s purchases would then be the Dec. 18 meeting. But the Wall Street consensus is that the Fed won’t act at that meeting, either. That consensus is based on the belief that the government shutdown and the debt-ceiling crisis whacked something like 0.6 percentage points out of annualized GDP growth for 2013. That translates into a drop in annualized growth in the fourth quarter from a projected 3%, according to estimates by Standard & Poor’s, to 2%.
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My favorite Dirty Harry quote, "A man's got to know his limitations" would exactly apply to all of those money printers who preside over this broken, bizarre economy.
QE 3 is like a toll booth. They tell you it’s going to be temporary, then everyone gets hooked on the revenue and it becomes impossible to remove. So it stays in place year after year, decade after decade and instead of funding the critical project it was intended to fund, it becomes a slush fund for passion projects and greed.
I understand the free market is an uncontrolable beast.
I understand that good accounting and solid business principles lead to WONDERFUL economy.
I look at the world with sceptical eyes. The Russian (mob), the Chinese (well, you know), middle east (unstable oil money pit), africa (diamonds, human exploitation), south america (drugs/oil), and on and on. We too have some funny business going on at the top. The books are cooked and we freely trade with a world whos books are cooked too.
Did I mention we're printing funny money?
The problem I have with the fed, is the same problem I have with wall street, the same problem I have with congress, and the same problem I have with the president. There is no end game.
Sustainable growth? Can we talk about sustainable, period. Infrastructure that isn't rated terrible. A society where our childrens futures aren't being spent to finance today. Look at our environment. Why isn't it clean?! Look at our labor. Why aren't there tariffs, that equalize goods so that American's can earn the paychecks to continue buying those goods. What good is China making cheap electronics if the only people who can buy them are cheaply paid retail workers. Return to American made. Make this country whole again and get the money out of the damn politics.
printing money to buy our own debt, so silly.
The House and Senate so useless.
Someone had better take a stand while we still have ground to stand on, an earthquake is coming.
The fed should have only three jobs.
1. Maintain an accurate and honest CPI.
2. Keep the real inflation rate between a deflationary 1% and 0% inflation (no more inflation). This will increase the purchasing power of the consumer. Also, this will bring real earnings to saving. If, savers can earn real income on savings, interest rates will stay low. Also, it will increase the value of the dollar. This would move money to America (an estimate 5 trillion dollars).
3. Replace the fed with a computer program ASAP.
"It's a hell of a thing, killing a man. Take away all he's got, and all he's ever gonna have." - Unforgiven
That's my favorite Clint Eastwood quote and pretty much what I have a feeling this market is going to do to a lot of speculators. Good luck my friends.
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