The week ahead promises more of the same for the market – irrationality leading to volatility. As much as I think the market ultimately acts in its own best interest, it is still subject to bouts of foolishness. The current back and forth on whether the Fed will begin to withdraw QE is an example of the foolishness of which I speak.
- The Fed’s potential policy shift over the past weeks has been a classic illustration of how fundamentals ultimately drive technical moves. We may have a deeply entrenched uptrend for risk assets, but QE has been its perceived driver. Threaten that driver, and the rally stops.
The breathless media tells us the market fears the Fed will begin withdrawing its current $85 billion per month in bond purchases because recent US economic data suggests the US economy is still moving forward. Now, why on earth would the market believe this is the case? What makes the market believe that Ben Bernanke would consider withdrawing QE until the economy is on surer footing? If anyone knows anything about Ben Bernanke, it is that he will not be premature in withdrawing support for the US economy.
- Bernanke was born to be Fed chairman in the middle of a financial crisis. He literally wrote the book about the Great Depression and used the lessons learned from his studies to avoid repeating the mistakes made 80 years ago that caused our great-grandparents such protracted misery.
And what mistakes is Ben Bernanke trying to avoid? What is it that drives him to keep moving forward with his QE experiment?
- It is such a relief to have finally escaped from the worst recession in 80 years that it is natural to want to get back to “normal,” even though we know that since the traumas of 2008-09 nothing will ever be quite the same. The same temptation to return to the old ways lured Franklin Roosevelt to abandon prematurely his New Deal stimulus measures in 1937. The result was “the Roosevelt Recession,” a wrong turn in the history of the New Deal that both progressives and conservatives prefer to forget because of the unnecessary pain caused by braking too soon.
As well, there is another confounding aspect to this notion that the market fears a tapering off of the Fed’s QE.
- If that mentality that QE is all that’s supporting markets holds up (likely), then a very good set of jobs data could increase expectations that a cut in stimulus is coming. If so, stocks and most other risk assets would fall.
So, let me get this right. If the jobs report coming this week and other economic data shows the US economy weathering both the mandated spending cuts and the spring swoon, the market will not like that because it means the Fed could stop supporting a weak economy with its QE?
- In theory a really great report could convince markets that the US recovery is becoming self-sustaining, but you need a series of good reports to create that kind of positive sentiment, and we haven’t had them yet. No one report, no matter how good, is likely to convince investors that QE can be cut back without harm to stock and other risk asset prices.
Okay, I did get that right, which then brings us back to the irrationality of the current market mindset, or at least the mindset the breathless media is describing, which then brings me to the conclusion that none of this makes sense.
The market might be wigging out about the “to taper or not to taper” controversy the breathless media is creating. However, when the dust from that clears, the market will choose to like an economy that is strengthening rather than dislike the speculative notion the Fed is considering the possibility of tapering off QE later this year or in 2014.
- Markit’s U.S. Manufacturing PMI (Purchaser Managers Index) for May was reported at 52.3, which was slightly above the consensus for reading of 52.1.
- Ford May U.S. sales: +14% to 239,280 vs. estimates of a 13% gain.
- The China Federation of Logistics & Planning reported that China’s official Manufacturing PMI for May came in at a reading of 50.8. The May level was above the consensus expectation of 50.1 and the 50.6 seen in April.
This week promises more of the mixed up reality we have seen in the market recently. The jobs report on Friday is the culmination of the data coming out this week. The market’s reaction to that data will tell us much about whether it has gone to the dark side of fear or, as I think, it cares more about a strengthening US and global economy. It should be interesting, yes?
Trade in the day; Invest in your life …
