Buzz on the Street: Mr. Market Walks Into a Bar With QE3, iPhone 5, Mark Zuckerberg, and a Geopolitical Powder Keg
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Thursday, September 13, 2012
Waiting on SuperBen
I know, I know. Everyone is waiting for the Fed to announce another round of QE, blah blah blah. There are two questions at hand when it comes to the Fed, which Matt Miller of Bloomberg asked me last night on Rewind. The first is "will the Fed act?"
I have maintained for some time that globalization not only makes stocks correlate closer to one, but also increases the coordination of central bank policies. The ECB fired the first shot, and it looks like the Fed and People's Bank of China will be next. The second and more important question is "will it matter?" The answer to me is probably not. QE3 already happened through the fear trade - QE3 was you and me sending yields to all time lows in the face of no Lehman event having taken place to justify that panic.
It is likely a meaningless exercise for the Fed to act now when the reality is that rising markets are more stimulative than money printing at this point. The one thing I think today will provide is some removal of the "air of uncertainty" over domestic policy. Beyond that, this bull market is being driven by its own merits and the Great Realization that the negative narrative was ultimately a work of fiction after all.
FOMC Rate Decision
The Fed will purchase $40 billion in MBS monthly, continuing "Operation Twist" and it will continue to be "open ended". They intend to keep policy stimulative "for a considerable time. Guidance is kept low through mid-2015. They intend to increase their longer-term holdings by about $85 billion per month.
These purchases will begin tomorrow.
By my last recollections, the Fed was buying $25b in MBS per month to reinvest prepayments on MBS, so if I'm reading this right, that makes this about $15b in new purchases.
More QE As Should Have Been Expected
Bernanke followed through with his Jackson Hole speech and didn't pull the football away from Charlie Brown. More QE he brings totaling $40b per month in MBS with no specific timetable on when it will end, thus considering it 'open ended.' The Fed also extended its desire to keep the Fed Funds rate "exceptionally low" thru mid 2015 from "at least thru late 2014." The Fed "is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."
Bottom line, Bernanke gave us what many should have expected after his Jackson Hole speech where he defended previous QE and gave his 'grave' concerns with the labor market comment. This policy will do nothing for economic growth, raise commodity prices, will further clog their balance sheet with longer term securities and will make the process of an eventual and inevitable exit highly disruptive and messy. The Fed did little to convince me that the benefits of this new policy comes anywhere near the costs. Also, the Fed again is showing no faith in the regenerative powers of American capitalism where growth naturally happens as long as markets remain free.
Friday, September 14, 2012
T Report: The Carrot and The Carrot
Two Carrots Don't Make a Stick
I've always assumed the adage about a carrot and a stick had something to do with donkeys specifically, but was a great way of summarizing reward and punishment. The "carrot" was the reward. You dangle the carrot as a reward for good behavior. The stick was there to punish failure. In many ways, the Fed removed the stick yesterday. We now live in a carrot and carrot world. I know a few places I would like to stick a stick right now, but I can't help but think this change is going to have negative repercussions in the longer term.
Two Wrongs Don't Make a Right
I was wrong yesterday. I didn't think the Fed would do it. I also thought the initial muted reaction was a sign that it was priced in. I was wrong, but I've been right for the most part for awhile, so I can live with yesterday's mistakes. It bothers me, but not immensely.
What concerns me more is that I was wrong in September 2010. I underestimated the impact of QE2. That is what is bothering me now. Is this a replay of the fall of 2010 where we are at the start of a long relentless march higher, or is that so priced in, that it doesn't happen again? That is the real question. Will the open ended QE spark another spurt higher, or is it different and too much priced in? I'm trying to get my hands around that, and being wrong in 2010 is clouding my judgment.
Two Mortgage Providers Don't Make a Fed
If Fannie and Freddie announced that they were going to underwrite more mortgages yesterday, would we have rallied so much? While Fannie and Freddie cannot print, they are as much a part of the U.S. government as the Fed (technical accounting issues aside).
In fact, Fannie and Freddie are shrinking. The government wants their balance sheet reduced. The Fed has stepped in to pick up the slack. Why are we so much more excited about the Fed buying mortgages than Fannie and Freddie? Yes, I can see the printing argument, but the reality is that at least a part of yesterday's announcement is picking up the slack rather than creating new additional demand.
I am not sure how that plays out, but it is a question we need to ask ourselves. Why does the Fed buying something count more than Fannie and Freddie buying something?
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