Surprised Markets Rally To New Records, Then Retreat
Is it just me, or does anyone else find irony and abnormality in the headline, “Fed Cuts Outlook Again, Cites Fragile Economy, Stocks Roar to New Records”?
Welcome to The New Abnormal, friends, a surreal condition wherein bad economic news is cheered by the frat boys on Wall Street because it means that Professor Ben will continue to enable them by keeping their punch bowl filled with their favorite elixir: Free Money spiked with Guaranteed Outcomes. Like a soccer referee kicking goals for one team at the expense of the other, Dr. Bernanke has long since lost even the appearance of objectivity; now he can add competence to that list of the missing.
So let’s review: First, in an attempt to jump start the housing market, the Fed last November announced the “indefinite” monthly purchases of $85 billion ($1 trillion per year!) of mortgage-backed securities (MBS), and housing quickly rallied to become the lone pillar of a one-pillar economy. Naturally, the stock market soared. Then, citing the improving economy, Mr. Bernanke speculated in June that, come September, the patient may be healthy enough to become weight-bearing without crutches, and that they may—may—be able to begin tapering those MBS purchases ever so slightly. Like spoiled toddlers who just had their cookies taken from them, Wall St. responded with a “taper tantrum,” driving up mortgage rates by over 1.13 percent in a matter of weeks, the most violent increase in market history, and dropping stocks nearly 6 percent. Naturally, housing began to slow as mortgage applications decreased and refinancing slowed to a trickle, jeopardizing the economy overall. Consequently, the Fed just reduced its growth forecasts (again), and decided last Thursday not to taper—whereupon Wall Street celebrated sending the markets to record highs—only to sell off again last Friday wondering, “What else does the Fed suspect is happening that they don’t dare tell us?”
Is anybody else having the same déjà vu flashback moment that I am? Wasn’t it just six years ago that Mr. Bernanke, in response to a reporter’s question, smiled reassuringly and told us that the growing Subprime Mortgage Crisis “appears to be contained”—right before the bottom fell out of the market?
The Fed meets again on October 29 and 30, even as the current moniker of “overbought market” is reminding many of how self-evident “technology sector overvalued” had become in early 2000—right before the NASDAQ Composite lost 63 percent of its “overbought” value in the 33 months that followed. While we probably won’t repeat such a sizable sell-off, there are voices of reason rising, like Saxo Bank’s Steen Jakobsen, who are calling for an advance of the S&P 500 to 1770, followed by a 30 percent sell-off thereafter. Marc Faber says the endgame now is “total collapse, but from a higher diving board,” adding that the Fed has “boxed themselves into a corner where they are now kind of desperate.”
While similar opinions crowd the periphery, the common wisdom on Wall Street is embodied by economist Stephen Guilfoyle:
“…The Fed now sounds like they will never take their foot off the gas. …They are likely to keep this up for an extended period of time, unless there is significant improvement in the economy. Stocks are still the best game in town…”
Sure. Right up until they’re not. So belly up to the bar, boys, and dip your ladle deep into the punch bowl. And while drinking your fill, pray for bad economic news, so this surreal rally may continue apace, regardless of the long-term consequences for our grandchildren and our nation.
Thomas K. Brueckner
President & Chief Executive Officer