Banking on "Market Perception" for Assurances
Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.
The following exchange is a follow-up to an earlier mailbag posted by Professors Reamer & Succo. To read it, click here.
Scott and John,
I agree that the Fed is tightening by slowing its "open market" actions (reducing money supply) and is continuing its "measured" pace rate increases, but I believe that the market perceives that the current level of rates combined with money supply is stimulative and the delta between the current level and the phantom neutral level is increasing. In reality this may not be the case, but the market "perceives" that the economy is accelerating and that the delta is getting greater.
As to my change of stance (raising my market target) as being evidence of capitulation, it may be, but realize that I am just not being as aggressive on my downside bets. I am in no way jumping on Hoofy's bandwagon. As for SPX fib level 1250-1260: since it has become such an embraced top side level, I have come to believe that we will either rollover before we hit it (SPX 1225-1235) or push through it. Since we are now so close to that level, I am having a hard time embracing it as "the" rollover level other than for a trade.
Your statement that, "the market perceives that the current level of rates combined with money supply is stimulative and the delta between the current level and the phantom neutral level is increasing. In reality this may not be the case, but the market "perceives" that the economy is accelerating and that the delta is getting greater..." speaks to the observation that John and I made yesterday in a back-and-forth IM that was posted on the Buzz: the unholy alliance between psychology and liquidity.
The psychology is still very one-sided and bullish. The liquidity to make that psychology manifest in stock prices is contracting rapidly and has been steadily doing so since July 2003.
At some point, the current rate of decline will no longer allow for the manifestation of that underlying bullishness: the "real" money supply simply won't be there to speculate on stocks. So while it might not matter in very short time frames that "perception" of psychology (I'd call it moral hazard but who's to quibble?) is trumping the reality of liquidity in the economy, we are far enough into this trend (remember that 1987 analog I used and the delta's that are now operative) that banking on perception for assurances of higher stocks prices is risky business.
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