Bernanke leaves the markets confused where to go next
Posted on 22 September 2010 with 4 comments from readers
US stock futures fell, shares in Europe dropped and the UAE market rally faltered after the Federal Reserve failed to promise any further quantitative easing yesterday, something traders think is a magic formula for higher share prices.
‘The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate,’ said the Federal Open Market Committee statement.
Quantitative easing
Market bulls had been hoping for some more definite news on further money printing. Gold hit a new all-time high, the dollar weakened and two-year bond yields hit an all-time low in advance of the statement.
Traders continue to believe Fed chairman Ben Bernanke will have to buy additional US bonds in coming months to keep interest rates at record lows. This market intervention is likely to spike inflation higher but maintain the relative attractiveness of yields on stocks.
However, quoted companies will have their work cut out in meeting profit expectations, and the possibility of profit downgrades on the horizon is also leaving the stock market unsure which way to jump. The worst of the financial crisis may be past with the banking system seemingly well capitalized again but the stock market could well be pricing in a recovery that is just not coming anytime soon.
Weak economy
Data for housing, consumer confidence and unemployment remain very discouraging, and the US leading indicators index still points to a recession. Market traders concede that it would not take much by the way of bad news to send the stock market rally back into a reverse as in August and the May 5th flash crash.
Stocks may well be climbing a wall of worry or they may be about to fall off the cliff again. Mr Bernanke increasingly looks unsure what to do. The bond market bubble is worrying as the consequences of it popping would be huge for interest rates and the economic outlook. Yet it will have to unwind one day.
On the other hand, fuelling up stocks into a bigger bubble also risks destabilizing the US financial system again. Caught between the devil and the deep blue sea the market will probably have to make up its own mind.
4 Comments posted by readers:
The worst of the financial crisis may be past with the banking system seemingly well capitalized again . . .”
I really don’t understand why your commentary included the phrase above; the “saving grace” here is that you used the word “seemingly.”
If these big banks are suddenly forced to “play-by-the-rules”, they would all be required to “mark to market” rather than “mark to fantasy”.
Using what should be the proper benchmarks, can you name one big bank that is well capitalized?
Bill Gross of PIMCO was on CNBC yesterday. He said that he is hearing that the Fed is going to lower its’ projected US growth rate for the next year, to 18 months, from 3% to 2%. He said another 2 trillion of QE is possible, and seems to think that it is on the way, after the November elections. He said the dollar will eventually pay the price, but that may be the lesser of two evils.
An interesting article by the chief economist of MarketWatch says that any cut in Federal spending, while the US economy is so weak, is nearly guaranteed to cause another recession. So when the Republicans take control of the House next year, should they start a balanced budget crusade, expect another recession to start around Christmas, 2011. If State & local governments are then forced to lay off over a million employees because they can’t get Federal help (as they have been doing) , get ready for another Great Depression.
I read and interesting article by some smart Western banker in Asia. He said to assure future growth of the US economy, the US Government should forget about the debt and borrow trillions. It should use the money to invest in the technologies of the future, nanotech, biotech, and robotics. I have heard several times that manipulation of genes has the possibility of sparking another industrial revolution. (I guess?) Some very rich venture capitalists are pouring money into it, so there must be something to the idea. We will see. He aslo said that the world would need to create 30 trillion of new money to replace what wealth has been lost in the downturn. Whatever that means. I think it was a MarketWatch article.
I just wish it would drop below 31 degrees C around here. And now CNBC just had to show Michael Jackson’s former Neverland ranch in California with that clear blue, cool sky to torture me. I have to keep telling myself, ‘earthquake, earthquake, earthquake…’ so I don’t get too upset. And, more seriously, I have to remember the recent interview with Robert Hirsch, in which he warns that RURAL US real estate will CRASH in value, once peak oil causes gasoline rationing in the USA. His team now thinks that it will happen within the next 2 to 5 years. (CNBC just announced that housing prices are down 3.3% from this time last year.) Even I can see that rural housing price crash coming, and I’m not that bright. It is like the housing bubble. Most people thought that housing prices couldn’t fall too much. And most people think the Earth contains all the oil we will even need. Sure it does.
I’m sitting here wondering how many other people in this country realize that the US Government will be forced to ration fuel. Can you see how people will react if they just let the price determine who can afford gasoline. Can you see only the well off getting $10 a gallon gasoline? Can you say riots, looting, martial law, revolution? Remember New Orleans after Katrina? Brian Williams of NBC News had to flee to Kenner. Nope, gasoline will be rationed. With 25,000,000 tons of food leaving the Mississippi River yearly (they didn’t fight the Battle of New Orleans for nothing [sorry, Peter]), you had better hope it is rationed.
So all you folks living the good life way out in the country, and driving 40 miles each way to the office every day, might want to look for a nice place in an upscale suburb, a little closer to your work. Hirsch did. Or just keep thinking that nothing will ever change, or that those folks at the gas station will let you pump all you want.
Or, I might be wrong, and everything will be fine and dandy. I hope so.
@Bill Simpson:
You were in rare form with your remarks yesterday! . . . gotta say that I even felt a little guilty after reading the following phrase:
. . . clear blue, cool sky to torture me. I have to keep telling myself, ‘earthquake, earthquake, earthquake…’ so I don’t get too upset.
But I gotta be honest here; as one who lives in San Diego, I only felt “a little guilty” . . . and that feeling lasted for only a microsecond or so. I’m a “transplant” from the east coast of the US (in CA since 1988). More honesty here: I don’t know how I put up with all that foul east coast weather for sooo long. Hot, humid summers, hurricanes, and cold, icy winters . . .
Like I had said before… Markets are going up and Dubai’s Index is also going up just watch and see what happens on Sunday and Monday of this week when Dubai’s exchange opens for trade. I expect to see some major gains in the near term. Stocks in Dubai are cheap now and will be pumped in the same way the stocks in the US were.
I have a buy rating on DFM shares. I like DFM,ARTC,ARAMEX,DIB and EMAAR.