"It's obvious the Fed is deeply concerned with what is happening and they also know they need to dance a fine line," said Todd Schoenberger, managing principal The BlackBay Group. "The risk is greater by not doing anything."
"Stocks dropped to their session lows shortly after the Fed said it is open to the possibility of buying more bonds to stimulate the economy, but added that conditions might need to worsen for a consensus to build, according to the minutes of the its latest meeting in June. The market eventually recovered most of their losses in the final half-hour of trading."
So there's the rub-the Fed is open to buying more bonds though things have to get worse. Is it like the police will protect a woman from her stalker after he has her hands around her neck? This was on top of the news that Spain is doubling down on austerity raising the VAT to 21%
There seemed to be a smidgen of good news in that the trade gap narrowed:
"On the economic front, U.S. trade deficit narrowed 3.8 percent to $48.7 billion in May, according to the Commerce Department, in line with expectation. And wholesale inventories for May gained 0.3 percent in May, according to the Commerce Department, also in line with expectations."
So the possibility of QE3 which is believed to be bullish wasn't bullish... Is it because there is it worry that the Fed is worried? Or worry that the Fed won't be worried enough until things get even worse?
"Minutes of their June meeting released Wednesday show that Fed ![[cnbc explains]](http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/_News/_CNBC_EXPLAINS/_IMAGES/CNBC_explains_icon1.gif)
officials signaled their concern that the struggling U.S. economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year."
officials signaled their concern that the struggling U.S. economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year." Yeah the old fiscal cliff. I find that I'm sanguine about that worry. In any case there seems to be plenty of time and I'm skeptical about how bad a thing it would be. I never believe tax cuts for the rich are stimulative in the first place. I know the Right desperately wants everyone to believe that the worst thing in the world are taxes for the-the job creators-but I don't buy it.
They did also express worry that the euro crisis could weigh on US growth-that for me is the big worry. I think that is the main worry. Spain's austerity is on an economy with a 25% unemployment rate-ouch.
Treasury prices rallied and yields fell-there's something you don't read every day! I feel that somehow there will be people who don't know I'm being real sarcastic-we read about that every day, that's the joke. Once upon a time the bond market was in a 40 year bear market. Since then it's been in a 30 year bull market and it's beginning to seem like this will never change.
Sumner did make a good point the other day-today we think of a 7% yield in places like Spain and Italy as cataclysmic but just a few years ago there was nothing special about such a yield. In the 70s those would have been very low yields. The reason for this Sumner explains is... This is Scott Sumner so hopefully you know the answer the difference is now we have seriously depressed NGDP.
Of course some market participants are declaring this a buying opportunity:
“The extraordinarily bearish sentiment is an opportunity to get into the market at low prices,” said Doug Cote chief market strategist at ING Investment Management. “Things are much better than the market is pricing in and I think there’s going to be two catalysts for markets to go up—realization that global risk is overstated and fundamentals are far better than what the market’s pricing in.”
It's hard for me to believe it won't be soon.. I always look at Bank of America and say it's got to be soon-I mean at $7.63-today's close-how much worse can it get? Yet dwb the Money Illusion commentator argued that none of the banks are buys. I forget his reasoning but whatever it was it sounded like he may be right. I know Nanute remains bearish.
Mike,
ReplyDeleteI've now been without a Bloomberg terminal on my screen for about 10 days and admit to feeling somewhat relieved from the pressure of understanding the markets constant reactions. Anyways, my take is that most major market participants expect the Fed will expand its balance sheet later this year and probably in August. Today's minutes may have dampened those expectations a bit. Personally I believe the Fed recognizes its previous actions have not played out as expected and will be hesitant to act leading into the election. (Check out the NY Fed's post on the Greenspan/Bernanke put, also highlighted on my blog).
Apart from the Fed, I think you are correct that the problems in Europe will have a greater impact on US growth and earnings going forward. Don't forget about China either.
Lastly, I agree with dwb about staying away from the banks. Check out this post from the Brooklyn Investor (http://brooklyninvestor.blogspot.com/2012/06/banks-real-nightmare.html.) Low interest rates could be terrible for bank earnings.
TK WOJ! Will defintely check out the linkk form Brooklyn Investor.
ReplyDeleteFor me the saving grace is Obama seems like he can win even with a slowdown. On the other hand maybe it will be like the last two years where we come back at the end of the year-Sept on.
Mind you I don't know how Europe gets resolved right now but we'll see. They're doing things they never said they would but the Spainsh austerity doesn't make it look better that's for sure.
Mike,
ReplyDeleteYes I'm bearish on the banks, and Bank of America in particular. (Too much Countrywide exposure for me.) Furthermore, overstating assets through the suspension of MTM, is also problematic. There is no transparency here. It could be a good bet, but it is highly speculative under current conditions.
(PS: Might be able to make it for Popeye's tomorrow. You really should be eating more vegetables, though.)
Hey Nanute. Yeah WOJ makes an interesting point too about low interet rates on bank profits.
ReplyDeleteI probably should eat vegetables-maybe I'll start next week LOL
Right now I got no phone or money and Popeye's is sort of my consolation prize!
Mike,
ReplyDeleteI think you're right about Obama's chances. As an independent, Romney simply offers little different from Obama that is encouraging. Also, I think a slowdown may help Obama as people clamor for greater fiscal stimulus.
As for Europe, I haven't read through the full memorandum of understanding but it looks pretty much in line with all the previous bailouts. Spain gets some funding (which is inadequate) in return for hitting future deficit targets and greater oversight. Although I don't expect this outcome anytime soon, my base case (following Edward Harrison of Credit Writedowns) is for an eventual breakup. The politics is imply moving to slow and to ingrained for the crisis at hand.
As for the banks, I agree with nanute that they're a highly speculative play (too high for my taste).
Yes no question Europe is moving too slow. They're trying-they just gave Spain more time to meet fiscal rules-though they then made them raise the VAT-and Merkel has in theory said yes to eurobonds, etc.
ReplyDeleteBut the pace is too slow and the reason is no doubt political.
A breakup in many ways would be unfortunate as the political impetus-as opposed to the structur of the currency union-was very good.
The idea of a policial union of Europe has a lot still to say for it. However, the structure of the currency union is such that it was designed to fail.
The fallacy was an attempt at monetary union without fiscal and political union first.
Not sure I entirely agree with that conclusion. A currency union without political and fiscal union was poorly conceived, however I think the idea of a political union in Europe is far more idealistic than many believe. The majority of countries in the Eurozone speak different primary languages, have vastly different cultures and live under widely varying laws regarding taxes and social welfare (this is far different from the states becoming united). To imagine those differences can be easily overcome in a manner that all can compromise seems highly doubtful.
ReplyDelete"The majority of countries in the Eurozone speak different primary languages, have vastly different cultures and live under widely varying laws regarding taxes and social welfare (this is far different from the states becoming united). To imagine those differences can be easily overcome in a manner that all can compromise seems highly doubtful"
ReplyDeleteWoj it's hard to argue with any of that. No doubt there are much bigger differences between Germany, Greece Italy, and France than between the various U.S. states-and this took a long time to achieve-the civil war, et al.