The market was off to a reasonable start this morning after great earnings by Apple last night. But, for most of the day, the major indices were basically flat. Then, Ben Bernanke began to speak to Congress giving his semiannual monetary policy report. The more he spoke, the more equity prices fell. I immediately flashed back two years ago when I used to see some politician on television and down we’d go. I’d look on my Bloomberg machine and see that a speech was scheduled later in the day and you’d watch the put options. The speech would start, the market would fall, and S&P 500 put options would fly. Maybe that trade is back on. It sure was today.
I was able to listen to most of the speech and watch the reaction tick by tick in the markets. And what I heard was Ben Bernanke (who I do like) give ALL his various options if the economy gets worse. This wasn’t in his statement but rather in response to a question. Remember, the complaint has been that the Fed is out of bullets. “Helicopter Ben” confidently said there are plenty of tools in his belt. First, he said he can change the language to let people know that the Fed will be more accommodating for a longer period of time. This will give the market more confidence that higher rates aren’t in the cards. Second, he said he could lower interest rates. Third, he said he could buy more bonds to keep rates down and inject more into the system.
Let’s analyze each of these options. First, he can change the language. So, basically that means do nothing. It’s jawboning and cheerleading with no real action. Second, he said he can lower interest rates. ALL the way down from .25% to 0%. Really? Remember when the Fed had rates at 5% or 6% back in the day? We would all wait to see if they were going to drop rates by .5% or .75%. Now, does he really think dropping rates from .25% (basically nothing) to 0% (literally nothing) will do any good? Last, he talked about buying bonds. That’s legitimate and certainly gives us a green light to buy more bonds. But, these different tools don’t sound like tools to me. They sound like the Fed is running out of bullets. I first thought to myself no wonder the stock market is falling. But, then I thought wait a second. This is the problem. We’re still relying on the government to fix everything. Hasn’t the Fed done enough? They’ve done their job. They’re finished. They’ve injected more capital in the last two years than we’ve ever seen. They’ve lowered rates to practically nothing to encourage activity. They’ve purchased bonds to keep rates low for longer than we had originally anticipated. And, they purchased all the “junk” that bank couldn’t sell. What more should we want? But, we saw the market sell off because the Fed wasn’t giving us any new information and inventing any new tools they could whip out of their belt that would surprise us and get the economy back on track any faster.
All those smug politicians asking questions to Ben Bernanke as if they have a clue about finance always cracks me up. I wish he would have asked them “What are you guys (& gals) going to do to get the economy back on track?” How about lowering taxes to stimulate small business growth which in turn creates jobs? But, no. What I saw was Congress cutting Ben Bernanke off in mid sentence so they could look smart and act like bullies.
This evening, I heard a politician say in an interview the Fed has a lot of options because they have so much on reserve. However, it’s not about the reserves. That’s like buying a stock because the company has a lot of cash. When a company has a lot of cash, that’s great but it’s what they do with that cash that’s important. We’re relying on the management to earn a return on that cash, not just sit on it. If the Fed has reserves, that doesn’t help anybody.
Again, I’ll reiterate. The Fed has done their job and it’s time for Congress & the President to step up to the plate and figure out how to grow our economy. All I see right now is other countries growing and the U.S. is about to embark on massive tax hikes which will drive capital offshore to these faster growing countries. America has a tremendous opportunity in front of it. We can capitalize on emerging market growth if we choose helping those unemployed find work and grow our economy. Instead, I think we’re wasting that opportunity.
Today’s drop wasn’t Ben Bernanke. It was a reminder that the Fed isn’t going to really do anything else. It’s up to someone else to take over. Ultimately, that’s not good in the long run.
Karl, If Ben buys more government bonds, do you think foreign investors would sell their bonds?
Mike, I don’t think so. If you know there’s a huge buyer of something, you don’t sell, you piggy back and ride them up. That’s a long-term threat, but I don’t think it’ll be a real threat in the next few months.
I see we have learned nothing thru the financial meltdown. GM buys Americredit, a company that loans to people that have trouble getting loans. Great let’s give more taxpayer money to people that can’t afford cars. Maybe they can loan people money to buy the $100,000 Volt when it comes out.
The fed’s monetary policy is creating another bubble that will show it’s ugly inflation head if and when we deleverage from our gigantic debt. I have read where private debt is 5 or 6 times our public debt. So the fed is swimming upstream trying to spend our way out. And they will devalue our currency to the extent that we can’t print more for lack of confidence. Boomers are increasingly saving instead of spending so future demographics create strong headwinds. Look at Japan’s last 20 years to see how futile the fed spending really is. We would be better off in the long run to let the poorly managed banks, GSEs, and union burdened auto companies fail. Then free markets will cleanse the economy and regain health much quicker.
Jim,
I agree with you on everything. The government at this point wants to create that bubble. They are basically saying we’ll worry about that down the road. However, the gov’t won’t let the GSE’s fail because there are too many other countries that own them.
I am certainly no bull-market cheerleader. However, technically, since 07/01/2010, even with the strong sell-offs, we have been on a subtle short-term uptrend. On an hourly, chart of the S&P 500 index, you can draw a straight line through the closing prices of the biggest sell-off hours to lows and see the support that comes in at those lows. That is a sign of accumulation by the institutions, after withholding their bids to get better prices, though this has been on relatively low summer volume. This has set up a challenge to major horizontal resistance in the last couple of trading days since Karl’s excellent 07/21/2010 post, and the index has closed above 1100. Now, the 1131 high of 06/23/2010 looks like a fulcrum, that if exceeded, could propel the index back to challenge the April highs. Everything hinges on expected economic growth, which is negative right now, per ECRI (http://businesscycle.com). What has changed? I think possibly the rumors of a revolt among more “moderate” Democrats, agreeing with what Republicans have been pleading, to extend the Bush tax structure, may be getting traders thinking that there is hope that headline taxes might be held or not increase so badly, thereby allowing economic activity to grow more rapidly. If those hopes are confirmed, we could see a fresh run-up in the markets. If dashed in political squabbling, then the market could drop significantly lower.
I couldn’t agree more Hedge!