Free-Market Capitalism Takes One on the Chin
Digesting the historic actions by the Federal Reserve.
Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.
Yesterday afternoon, I returned from my midtown board meeting to find the whispers (of an open-ended QE) had in fact become a reality. I settled in to share some thoughts on the topic when Peter Broockvar, the talented Equity Strategist, posted his take on our real-time Buzz & Banter. He and I could not be more aligned in our view, and he summed it up in short order. And I quote:
“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' through mid-2015 from 'at least through 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, further clog their balance sheet with longer term securities and 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.”
I hearken back to a column I wrote on September 19, 2008—four years ago next week—when the Fed declared Martial Law for the markets. The S&P rallied 4.5% that day—12% from the prior day low; a staggering move—before succumbing to the reality that nobody—and I mean nobody—is bigger than the market
It’s different now, we know. Back then, corporate America was at risk; now, sovereign countries are fighting for their financial life.
Back then, absolute returns were dismal, with the S&P roughly 20% lower YTD; now, relative underperformance is freaking fund managers out as quarter and year-end approaches and the S&P is 16% higher YTD.
Back then, the FOMC played defense in an attempt to buffer roiled global markets; now, their actions are offensive, in more ways than one.
This is not sour grapes; as discussed in this space, I've traded two-sided this year and more recently, I’ve kept my leash tight as the market took flight. It's just sad—truly sad—that we've come to this, and it's not about a percentage return or missed opportunities. It's about passing the buck to our children, lowering their quality of life, tempting socioeconomic fate, and making a complete mockery of our once free markets.
Late yesterday afternoon, at the height of the post-FOMC frenzy, I initiated a short position in QQQ with the Nasdaq up 40ish (stamp a ticket: 69.65 in the QQQ). I have set a stop-loss above QQQ 70 (it may get pulled there into next week's expiration) and it’s a pure trade—but again it's not about that, as my bonus daughter Mug would say.
As someone who has been earning a living in the financial industry for 21 years, I will offer that this will not end well, and it has nothing to do with the next 5%. From here to there, I’ll remind myself that the path we take is more important than the destination we arrive at, and if we take care of the minutes, the hours will take care of themselves.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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