Okay, below is an excerpt from what I said yesterday about the market. I bring this to you because it illustrates just how dang hard it is to time the market.
Maybe the market is weary, or maybe it is fearful the Fed might not bring Christmas early, or, maybe, the market is looking for a reason to sell. Whatever the reason for the market decline, I missed the boat. I surely believed the market would be up, up, and away today. Sometimes, what seems so obvious, is, well, just a vision, nothing more
My “vision” for yesterday is exactly what is happening today in the market, and the consensus seems to be that it is a delayed reaction to the Fed’s commitment to pump up to six-hundred billion more dollars into an already flooded money supply over the next six months. It appears to me now that yesterday was more than likely a sell off while standing under the hanging knife. It seems that the market wasn’t quite sure what would come out of the FOMC meeting, and when the words finally popped out, it took just a bit for the market to digest the magnitude of what the Fed is doing, again.
One underlying and somewhat obscure possibility that dribbled out among the all the noise yesterday is that the Fed is willing to consider, now get this, implementing a QE-3 and a QE-4, if necessary. According to one piece I read, the Fed is willing to take this QE stimulus all the way to, now REALLY get this, 4 TRILLION on its balance sheet.
I don’t know about you, but this stuff is bending my mind. On the one hand, we are talking about printing $4 trillion and buying $4 trillion of our own debt, which is scary. On the other hand, this just might cause the hottest short-term rally in decades.
Consider the fact that the Fed believes we need inflation to get folks, now get this as well, OUT of treasuries and into more risky asset classes, such as commodities, equities, and real estate. Driving short- and mid-term interest rates down is the key to the above. Keep an eye on the yield curve, oh yeh … Watch the price of oil go higher and higher, oh yeh … Pay attention to the multiplier effect, oh yeh … This last one is less discussed, but it, might, in fact, be the one piece of the stimulus that will actually work, assuming banks don’t continue to just use the cheap money to enhance their profits and increase shareholder value.
The estimate for the multiplier effect is at the low end 3x and at the high end 10x. For the sake of my sanity, let’s assume banks will turn that $600 billion into $1.8 trillion (3x), which is what should happen as they work the liquidity into profits. Now, the idea is that the banks will then turn around and lend that money ($1.8 trillion) to, say, homebuyers, small businesses, and consumers. So far, QE-1 ($1.7 trillion) has produced some, but not a lot of lending. The reason for this is that banks needed to get whole again, and it looks as if they have done this, more or less. So, will Qe-2 work? Well, we will see, but in the meantime, I suspect the market will drive higher and higher, at least until the sheer weight of our massive debt begins to bend the ethereal support underneath it. Before that bending, though, I need to somehow find a way to unbend my mind, as I have never, nor has anyone, ever seen anything like this, ever.
Trade in the day; invest in your life …
