Daily Market Reports | Sep 17 2012
By Rudi Filapek-Vandyck
I make no qualms about it, I was surprised by the announcement of an All-In QE3 on Friday by the US Federal Reserve. A bit like 98% of all market experts and participants, I guess. But then I wasn't. Let me explain.
From where I am sitting the so-called US economic recovery was never on a solid footing post 2008 and it hasn't been to this day, even though so many people the world around wanted to see a self-sustaining recovery. You'll probably remember how I tried to pour cold water over red hot running market sentiment at the start of this calendar year, when all that was happening was unusually warm weather that compared itself with an unusually cold winter the previous year.
In recent months I became quite concerned as the indicators and economic insights I was looking at were clearly trending south. So no guessing as to why Chinese data eventually gave in too. It's all intertwined nowadays.
See, also "How The GFC Morphed Into A GFZ"
Clearly, the Federal Reserve has been watching those same indicators with that same uneasy feeling in the gut, to put it in a very simplistic manner. Which is why we've seen a much Bigger Bazooka than most out here in the real world had been expecting.
Make no mistake. Be it for the better or for worse; Friday's announcement by the Federal Reserve is yet another historic move in what can easily be described as the Biggest Monetary Experiment in Human History. These are times over which academics will quibble for decades and scholars will study and study and come to diverging conclusions.
What is extremely disconcerting is that people such as David Wessel, the economics editor of the Wall Street Journal, have been giving presentations across the globe this year showing their inner circle of academics and commentators that the underlying situation in the US is far worse than it is in any of the Southern European countries. Yes, you can read that last sentence again. It will remain as is.
Another picture that has emerged out of all data and charts I have been glancing at over these past months is one whereby corporate America is seemingly sitting on Mount Everest with records amounts of cash, all-time high profit margins and share prices that are almost back to where they were at previous peaks, but Mainstreet America is out of a job, in a disability pension, on food stamps, working for less (in real terms) and seeing its wealth and savings eroded by Federal Reserve policies.
I'd be inclined to think we will see the return of the Occupy Wall Street movement at some stage, but this time with more gusto and with more social leverage.
And yet, one obvious question stands out: if my view was correct in that the US economy was looking rather wobbly instead of increasingly solid, was that really so bad as to warrant such a Big Bazooka announcement? It's not like anyone was expecting a return to Lehman-failure days and at the end of the day, no matter what actions will be taken, the Fed will not be able to eradicate ups and downs of the economic cycles.
It's here where this matter becomes "interesting". What does this tell us?
To some experts, Friday's announcement marks the victory of Nobel Prize winner Paul Krugman's idea of an "irresponsible" Fed who conveys the message to all market participants it will leave zero interest rates and abundant liquidity in place for much longer, even after economic growth has solidified. Just like Ben Bernanke cut his academic teeth on causes and solutions for the Great Depression of the 1930s, Princeton professor and former Reagan administration official Krugman spent a lot of time analysing what went wrong in Japan since the Lost Decades kicked in.
Krugman's conclusion has been that low interest rates and Quantitative Easing in itself weren't enough: the central bank must "commit to act irresponsibly" and the way to do that is by convincing consumers and businesses it will fire up inflation and allow its flames to go higher. It is not difficult to see how this line of thinking has now entered the highest echelons at the Federal Reserve.
If successful, Friday's policy announcement will be a game changer. It means, as Dennis Gartman pointed out in his newsletter on the day, a new era has opened up and its new label will be "inflation".
Special note: the danger is, of course, that the Fed will prove too successful and we might see inflation in spades – not something any of us should be looking forward to, but one that will pump up sentiment towards gold and silver, and hard assets in general.
That's storyline number one.
Another obvious question is whether the economy is still really at the centre of Fed decision making? Many commentators in the US see direct links with the upcoming Presidential elections. The Republicans under challenger Romney have made it clear they want Bernanke out of his job. Obama welcomes any support on the economic score card he can get.
What about the banks? Are American banks still not healthy enough to withstand a sluggish economy and maybe even a temporary set back? Don't forget the US Treasury is populated with alumni from Goldman Sachs and JP Morgan and the Federal Reserve itself is owned by both and the Bank of America and others. Already, one commentator I read described Friday's QE3 program as a "welfare package for the banks". Another label being used is "Questionable Easing".
There's enough conspiracy material in there for another dozen movies by Oliver Stone and Michael Moore; each.
Wall Street will ask no such questions and neither will funds managers and stockbrokers the world around. Don't fight the Fed will yet again be the oft-heard advice.
But will it work?
Without going into much detail, but this all-crucial question remains as open-ended as the Fed's intentions. After all, just because Bernanke is convinced in the supremacy of monetary liquidity, it doesn't automatically imply the Big Bazooka will do wonders to the US economy. We are all reminded about economic genius Milton Friedman, who made it clear that what should be avoided at all costs during times of economic weakness is allowing the monetary base to not grow. Unfortunately, this is what has happened post QE1 and QE2 and Bernanke and Co know it.
The Fed is still fighting the enormous loss in velocity of money the world around and by letting consumers and businesses know it won't take the lollies away, while inflation is surely on the horizon, it is hoping they will spend more and push velocity higher.
As financial markets, governments and businesses could all do with a fresh injection of confidence, it is well possible an ultra-aggressive Fed can pump up American optimism, at least in the short term.
Don Coxe, Strategy Advisor BMO Capital Markets, is probably close to the truth when he concludes that what all these extreme Fed actions are achieving is they keep worse case scenarios at bay, but they do not trigger improvements, while raising significant question marks about the economy further out.
The way I see it, Ben Bernanke and his Monetary Wizards have locked up the American population in Willy Wonka's Chocolate Factory, effectively guaranteeing nobody will starve or die of thirst. After the Sugar Rush, questions will be asked as to what all that chocolate is going to do to the obese bodies, their teeth and the over-stimulated brains. Can America ever again leave the factory and eat healthily and work productively?
What a mess. Thanks Alan Greenspan. Thanks Goldman Sachs. Thanks Richard Nixon.
According to AMP Head of Investment Strategy and Chief Economist, Shane Oliver, in ten years' time we shall all be thanking Ben Bernanke for his role and his actions. Maybe not. Don't forget about David Wessel's presentations.
If QE1 and QE2 can be our guide, than QE3 has started a new upswing for equities and risk assets in general. Enjoy.
See also last week's "Required: A Leap Of Faith"
The economic calendar this week effectively kicks off on Tuesday, after the Australian share market has digested a few dozen of listed stocks go ex-dividend on Monday and Japanese markets will remain closed whole day. On Tuesday, the ABS will release data on imports of goods and the Reserve Bank will publicly release the minutes of the Board meeting held on September 4. Still on the same day, Reserve Bank Assistant Governor Guy Debelle will give a speech to a luncheon in Adelaide. In addition, the Bureau of Resources and Energy Economics is expected to release its Resources and Energy Quarterly that day.
One day later, the Reserve Bank, IMF and Federal Treasury are hosting a conference titled "Structural Change and the Rise of Asia". You can bet your money the press will be Tweeting and producing headlines about "Commodities boom this and that". Wednesday also includes a meeting of the Bank of Japan and -since we're in that mood- we might yet see the BoJ join Draghi and Bernanke with more QE. The Minutes of the last Bank of England meeting will be released on the day as well. David Jones ((DJS)) is scheduled to release its FY financials.
On Thursday, David Jones' retail peers Kathmandu ((KMD)) and OrotonGroup ((ORL)) will follow suit, as well as a few other companies, including iron ore play Gindalbie ((GBG)). Sydney Airport ((SYD)) will update on August traffic stats.
The US calendar is a bit more busy with the release of the Empire State manufacturing index on Monday. On Wednesday, housing is in the spotlight with data on both housing starts and existing home sales scheduled for release. Economists expect that housing starts lifted around 2% in August to a 760,000 annual level while new home sales may have lifted around the same magnitude to a 4.55 million annual rate.
On Thursday, the usual weekly data on unemployment claims are being revealed together with the leading indicator series, the Philadelphia Fed regional survey and the "flash" reading on the manufacturing sector. The leading index is expected to have eased 0.1% in August while the "flash" performance of manufacturing index is anticipated to have eased slightly from 51.5 to 51.0 in September. Also on Thursday, "flash" readings on the health of manufacturing sectors in other regions will also be released, such as a number of European countries as well as China.
Now that we do mention China; on Tuesday an update of property prices will be released.
Friday is quadruple witching day in the US, which means contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire that day.
I should be on Sky Business twice this week. Both on Thursday (noon-1pm) and 7-8pm on Switzer TV. If plans haven't changed, I might also make a re-appearance on BRR Media's Friday Afternoon Round Table.
Greg Peel, now a first account witness of the Chinese economy, will resume writing The Overnight Report from tomorrow onwards.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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