Five Things: Bank Stress Tests Reveal More About Our Obsessions Than Banks
What difference can it make whether banks pass or fail, when they aren't allowed to fail in the first place?
1. Something You Actually DON'T Need to Know… Bank Stress Tests
It may be a touch unorthodox to lead off Five Things You Need to Know with One Thing You Don't Need to Know, but remember: I'm not like the others. So the one thing you don't need to know anything about this week ahead are these so-called Bank Stress Tests.
Even though the results of the stress tests won't be known for a few weeks, the market is formally obsessed with the results of the tests. Which is strange, because despite releasing the "parameters" for examination last Friday what difference can it possibly make whether any banks actually pass or fail the "stress tests" since the government isn't allowing banks to fail in the first place?
Through that lens, waiting for the results of bank stress tests is really no different than standing around trackside in pitch-black darkness at 4:30 in the morning and asking a horse trainer how fast his horse ran. There is not an answer to that question capable of revealing anything either truthful or important. More on horse trainers in number 5...
2. F-O-M-C, Fed, Fed Fed!
This Wednesday and Thursday will be the next meeting for the Federal Reserve Open Market Committee. Truth be told, this barely made it onto the things you DO need to know versus the things you DON'T need to know, a la bank stress tests.
During the little over a year-long stretch between September 2007 and December 2008 when the FOMC slashed rates from 5.25% down to near 0%, what did the market do? The S&P 500 plunged 40%. Since December we're down another 3%.
This is what people mean when they refer to the Fed "pushing on a string." It's easier to pull a string toward you than push it away. In Fed-terms, that means it's easier to stop an expansion than reflate your way out of a contraction.
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