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Daily State of the Markets Good Morning. Anyone holding short-term interest-bearing investments over the past few years knows all too well that cash has been trash as far as trying to generate any kind of income or growth goes. With interest rates at historic lows, the incentive has been to borrow money as opposed to saving money in traditional vehicles such as savings accounts (do banks still offer such a thing?) and certificates of deposit. However in all fairness, the Fed has felt that trying to avoid a global depression probably outweighed the fact that savers and folks living off of interest-bearing investments have had a tough time lately. Yesterday’s much anticipated FOMC meeting and accompanying news conference was considered important to investors of all sorts as Mr. Bernanke was expected to tell the world how long ZIRP (zero interest rate policy) was going to stick around. After reading the report and listening to the news conference, perhaps the biggest message to be taken from the Fed’s newfangled targets and communication tools is that cash is going to continue to be trash for quite some time yet. To be honest, I was a little surprised to hear that the Fed is planning on keeping rates at or near zero through the end of 2014. Mr. Bernanke had already told us that we should expect rates to stay at “exceptionally low levels for an extended period of time,” which was recently defined as the middle of next year. Frankly, given the state of the global economy at the time, this idea certainly made sense as nobody expected anything to get better anytime soon. But with the recent economic data showing that the U.S. economy is actually improving, yesterday’s announcement raised some eyebrows. For starters, many will argue that it was the uber-easy monetary policy promoted by both the Greenspan and Bernanke Feds that was the root cause of the bubbles in real estate and mortgage loans, which, of course pushed the U.S. banking system to the brink of disaster. The general consensus is that the Fed simply kept rates too low for too long after the tech bubble burst and the tragedy of 9/11. As such, this allowed things in real estate and mortgage loans to get out of hand. Therefore, many will argue that the Fed is making the same mistake again – right here, right now. This leads us to the next question. Since the Fed has been heavily criticized for leaving the punch bowl at the party entirely too long, does Bernanke & Co. see something we don’t right now? In the Fed’s statement released Wednesday, there was little-to no mention of the recent improvement in economic data. However, Bernanke’s gang did acknowledge the difficulty in Europe. So, it is natural to wonder if the Fed knows something that we don’t. |
Another argument being made, which I happen to be championing at the present time, is that yesterday’s Fed announcement simply represents another insurance policy. Remember Mr. Bernanke is one of the foremost experts on the Great Depression. And his efforts to date to have been aimed at doing anything and everything possible to stave off a deflationary spiral. Thus, telling everyone yesterday that cash is going to continue to be cash for three years would appear to simply be a continuation of the Fed Chairman’s overriding objective – to avoid becoming Japan.
However, there is one nagging question. Given that the Fed did not see either the stock market or the housing/mortgage bubble, how on earth do they think they can predict what the economy is going to be doing 3 years out? Heck, a sea of highly paid, very smart analysts can’t even get close on their estimates of how much money Apple (AAPL) is going to make over a three month period. So, to think that a bunch of economists are going to be able to predict what the world’s biggest economy is going to do over the coming three years seems more than a little silly.
However, the game right now is about establishing confidence. If the public can be convinced that Bernanke is on the case and that nothing really bad is going to be allowed to happen, then consumers will spend and employers will hire. Confidence also tends to produce higher stock prices. And with higher stock prices comes more confidence, etc., etc. Therefore it appears that Ben Bernanke’s Fed is going to continue to do anything it can to try and keep confidence moving higher.
Turning to this morning… Overseas markets were generally higher overnight in response to the Fed’s announcement that rates are likely to stay low through 2014. In adddition, word that there may be a break in the Greek debt swap negotiations is providing an added boost to European bourses and U.S. futures.
On the Economic front… Initial Claims for Unemployment Insurance for the week ending 1/21 rose by 21,000 to 372K, which was slightly above the consensus estimate for 372K. Continuing Claims for the week ending 1/14 came in at 3.554M vs. consensus of 3.533M.
Next up, The Commerce Department reported that Durable Goods orders were up +3.0% during the month, which was better than the consensus expectations for +2.2%. When you strip out the volatile orders for transportation, orders rose by +2.1%, which was above the consensus for +0.8%.
Thought for the day… “We must not look to government to solve our problems. Government is the problem” — Ronald Reagan
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets:
- Australia: +1.00%
- Shanghai: Closed
- Hong Kong: +1.63%
- Japan: -0.39%
- France: +1.06%
- Germany: +1.48%
- Italy: +1.46%
- Spain: +1.37%
- London: +1.15%
- Crude Oil Futures: +$1.29 to $100.69
- Gold: +$21.50 to $1721.60
- Dollar: higher against the Yen, lower vs Pound and Euro
- 10-Year Bond Yield: Currently trading at 1.965%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.20
- Dow Jones Industrial Average: +45
- NASDAQ Composite: +4.84
Positions in stocks mentioned: None
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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