Is the big rally that comes under the assumption of more easing or monetary stimulus getting you back in the game? Are you breathing a sigh of relief because the EU has come up with another scheme to help a debt-ridden country? What’ll be the reaction to the next ‘stick save’?
Probably another 2-3 day run, right? The world will rejoice and all will be fine as billions are given to troubled banks – unlikely to ever been seen again in our lifetime. Is the market rallying on the Fed ‘possibly’ implementing a QE3? Like Pavlov’s dog the buyers come after stocks aggressively as the adrenalin kicks in like drinking three cans of Red Bull. Is this the kind of market you expect?
Sugar highs are short, sweet and exhilarating until you run out of sugar and then what? A craving, a headache, and perhaps a hangover. Like an addict you need more lift.
The fact is monetary stimulus can only go so far to kick in demand. This is where fiscal policy and restraint are crucial and have been talked about ad nauseum by Ben Bernanke, there is only so much they can do. The money supply is huge, the Fed’s balance sheet is enormous, but the velocity of money right now is so low right now the Fed would really have little fear in leaving it all out there for months, maybe even years. It’s like leaving cheese on the mouse trap but the mouse never comes out to try it.
There is no interest in loaning the money out (we’re talking in size now, yes there are loans but certainly not enough to stimulate the economy in a meaningful way). Whether or not the Fed chooses another deployment to jumpstart the economy is predicated on the data – and so far it’s not pleasing.
China has come in to ease their economy – they see more damage coming if there is a hard landing (that’s up for debate). We can look at their recent actions from two prisms: they are trying to stimulate their economy quickly or are afraid growth targets will drop so far that it’ll feel like a recession (let’s face it – from 8 to 3 would feel like a crash).
But lower rates and more stimulus is NOT what you should be looking for. What you want to see is growth, a healthy economy, lower inflation. It seems China and the rest of the world have it backwards. And therein lies the rub.
The Fed knows this to be true, yet at the same time is trying to manage your psychology. Trying to get you off the addiction of more liquidity is a monumental challenge.
How long do these rallies on stimulus last? A few days? A few hours? Is there really some foundation built around this news? Of course not, it’s just some hope until the sellers come out and hammer the market down – rinse and repeat.
And as we’ve seen over the last several days even the most aggressive easing is not allaying concerns of American companies. Just recently Cummins, McDonalds, Procter/Gamble and Ford have become cautious over the second half of 2012. Our fear is that companies will just throw in the towel for the rest of the year and wait until after the election. After all, if you’re sitting on a ton of cash why not wait until the clouds disappear?
Playing counter to the Fed in the bond market is/has been a troublesome trade (short bonds). When the Fed is in there buying bonds, this time around on the long end of the curve you do not want to be playing the other side of the trade. The Fed has more bullets than any hedge fund and can last longer as well.
Famed hedge fund manager Marty Zweig once said, ‘Don’t Fight the Fed’ and it works for bonds not just equities. The easy trade of course has been to saddle up with Bernanke and ride his coat tails. Those who chose to fight him have seen a losing battle. Some day it’ll implode – but not while the Fed is still pressing on the gas pedal.
You wanna wait for that moment? Can you hold on that long? John Maynard Keynes once said, ‘Markets can remain irrational longer than you can remain solvent’.
I’m not cynical, just frustrated and not amused by the same constant games that are being played over and over. For me, it’s mostly playing a different game – waiting.