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Don’t Be the Last One Out of the “QE Trade”

On June 19, 2013, in Currencies, Economy, by Tim

So, Federal Reserve Chairman Ben Bernanke apparently threw a cat amongst the pigeons earlier today when he made the following comments during the press conference that followed the policy committee’s meeting:

BernankeThe committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.

Not surprisingly, the price of just about everything except for the U.S. dollar fell.

The S&P500 dropped 1.4 percent and Treasuries fell, the yield on the benchmark 10-year note rising to 2.36 percent, its highest level in 15 months. Though this “signaling of tapering” their $85 billion per month money printing effort was largely expected, there were clearly some traders who were waiting for confirmation from the Fed Chief himself.

Given that the surge in stocks and bonds has been universally attributed to Fed largess, it should be interesting to see what happens in the days ahead. In theory, market participants should shift their focus to an improving U.S. economy and a better labor market in justifying current asset prices and the gradual reduction in Fed bond buying  should be a non-event.

That’s the way they’d draw it up in the economics text books, that is, if they have any textbooks on quantitative easing.

Little changed in the Fed’s policy statement as shown below, the only surprise being that St. Louis Fed President James Bullard dissented, indicating that the Fed should be prepared to provide more stimulus as long as inflation is very low.

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How’s this for an Image?

On June 19, 2013, in Economy, Stocks, by Tim

It should be an interesting day today as Federal Reserve Chairman Ben Bernanke weighs in on the health of the U.S. economy, the falling inflation rate, nascent asset bubbles, and increasingly volatile financial markets, all of which are influenced to varying degrees by central bank actions, both in the U.S. and abroad. From this Wall Street Journal story yesterday comes the image below depicting the worst case scenario for some investors.

We are off to Yellowstone for the day and, as such, won’t have anything to offer until hours after the dust has settled for what will likely be the most important Fed meeting since the December launch of their $85 billion per month money printing extravaganza, an effort they promised to keep in place until such time that the U.S. economy improves.

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Consumer Prices Rise 0.1% in May

On June 18, 2013, in Economy, by Tim

The Labor Department reported that inflation in the U.S. remains tame, the consumer price index rising 0.1 percent in May and just 1.4 percent higher on a year-over-year basis.

Though the annual rate of inflation is up from 1.1 percent in April, it is still well below the Federal Reserve’s two percent target and, as such, is likely to play a key role in the policy announcement from the central bank tomorrow.

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Art Cashin’s Take on the Fed Meeting

On June 18, 2013, in Economy, Housing, Stocks, by Tim

Someone once said that, in an ideal world, central banking would be boring – they would quietly do their job and both the economy and financial markets would do what they do.

Obviously, we’re far removed from that reality as nothing in the financial world matters this week other than the Fed meeting and, as we near tomorrow’s conclusion of said gathering, Art Cashin provides some insight into how markets see what the Fed may or may not do.

The key takeaway is as follows from the CNBC transcript:

He probability may say something like, “While the fed is happy that we’ve made some progress in one of our targets, which is payrolls and getting people back to work, we really haven’t moved the ball in the inflationary area.” We’re down very low, so, probably no tapering until the proper balance.
No tapering, but just an enhanced discussion of tapering is likely to roil markets.
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Southern California Home Prices Soar

On June 12, 2013, in Housing, by Tim

It’s going to be interesting to see what happens with real estate prices in the months ahead as rising interest rates appear to have been the proximate cause of a buying stampede in many parts of the country that has resulted in prices moving sharply higher. Word came yesterday that Southern California home prices (where we lived for many years, up until 2007) are on a tear, up 25 percent from a year ago according to this report from Dataquick.

Those are some pretty hefty year-over-year increases as indicted in red.

Sales are at a seven year high and prices are at their highest level since 2008, about two years after the price peak back in 2006.

Long-time readers will recall that DataQuick data was a regular monthly feature here going all the way back to 2005. There’s been nary a mention of this in recent years, though a simple search of the old blog shows lots of them, most referencing Marshall Prentice who, in 2005, promised that “most or all of of those gains are here to stay”.

Ah… memories…

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How to Tune a Car While Driving 40 MPH

On June 6, 2013, in Economy, by Tim

A few years ago, Ben Bernanke likened sitting in the big chair at the Federal Reserve to attempting to tune up a car engine while driving said car at 60 miles per hour.

Given that the central bank seems intent on adjusting its $85 billion in monthly bond purchases up or down on a somewhat regular basis beginning sometime later this year, it appears that car tune-up analogy is applicable again and Bloomberg’s Caroline Baum has some thoughts on the subject (the Fed, not the analogy) in this commentary today.

If I understand Bernanke, he is saying that every six weeks policy makers will examine an array of leading, coincident and lagging indicators, most of which are revised and subject to seasonal distortions, to take the economy’s pulse and reassess the forecast. From there, they will determine the appropriate amount of monthly bond purchases.

This idea is as infeasible in theory as it is in practice.

BloombergUnlike the physician who uses real-time feedback to adjust the dose of a patient’s medication, central banks operate in a world of long and variable lags. Their predictive models have a poor record. The continuation of QE has always been predicated on an improvement in “the outlook for the labor market,” rather than an improvement in the labor market per se. Call it a better jobs market once removed. The inherent flaws in the theory should be apparent.

As a practical matter, the plan is no more viable.

“The Fed doesn’t have a methodological way of calculating the relationship between asset purchases, interest rates and the economy,” says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co.

He’s right. But you could say the same thing about the Fed’s traditional policy tool, the federal funds rate, and the preference for adjusting it in 25-basis-point steps, according to Neal Soss, chief economist at Credit Suisse Group AG in New York. Both have “the same element of science, judgment, and trial and error,” Soss says.

He’s right, too. But interest rates are a lot more visible.

The conclusion that this will be “an extreme case of micromanagement that is likely to run amok” seems spot on and the Fed may already be regretting what, to some, appeared to be a somewhat hasty decision back in December to launch open-ended QE.

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