So Bernanke announced the Feds were going to taper - cutting $10 Billion per month from the $85 Billion they're creating out of thin air, an 11.7% cut in money creation, and the markets took off on the news, with the DJIA up almost 300 points (1.9%)
highfalutin reporter for Forbes who says "The taper, it turns out, for the stock and bond market -- and perhaps
even the economy altogether -- matters a lot less than we thought." I think one day doesn't mean squat to the world's markets.
If you come here regularly or often, you'll know that I believe that the entire "recovery" in the stock market is a bubble being blown by the money the Fed is creating. Corrected for this monetary creation, the DJIA has been going down in value since around the year 2000 (along with everything else - that's down in value, up in price). All that money has to go somewhere, and that's where most (all?) of it's going. I know there are those who think the velocity of money can be kept so low that inflation is not going to be a problem, but I laugh at that. It's the perfect printer theory.
I expected the markets to repeat the famous hissy fit they threw a few months ago when they mentioned they'd have to taper some day. I was wrong, at least for today. But without the constant inflow of new money going into the market, I can't see how it can go up for any length of time. To be fair, though, flow is still there, it's just down 11.7%.
Anyone who has driven a car for very long knows to be careful passing the car with the right hand turn signal on. Many people drift left to turn right. Big ships can take a mile or more to make a turn. Stock markets to don't always turn on a dime. Here's the thing: If the QE was never necessary then why did we have it? If it was necessary then how could it not cause an effect when we eliminate it?ReplyDelete
Here is what I think is going on: Money is fleeing the bond market and investors need a place to put it. Stocks look pretty good. Now, I don't think stocks look good but if you simply look at their recent history they look pretty good. So what the tapering of the QE will do is harm bonds and it's effect on the stock market will not happen for awhile. But it will still happen. Just as that car in front of you with the right hand turn signal on will drift to the left and the big oil tanker in the Pacific will eventually turn in response to the rudder turning the stock market will come down in response to EQE (easing quantitative easing). Not today but if the Fed sticks to their plan it will be soon.
Let me give you something else to consider. The yields on 30 year bonds are on the rise and have consistently been rising slowly for quite a while. Yields are breaking levels they've been below for quite a while. Bond prices going up is one of the really bad signals for the Fed. By saying they are going to slow their bond purchases, they're saying they're going to have less control over bond yields - and they don't have much influence now. Bond yields going up hold the threat of hurting housing and everything else. People can't afford that.
That sounds bullish for bonds, I think.
Eventually rising interest rates will be good for bonds. But the bonds in trouble are the ones already issued which lose their value with increasing interest rates. The change in value can be huge with a small interest rate increase.ReplyDelete
The only people who think "markets are rational" are economics professors - who don't make a lot of money in the market usually.ReplyDelete
If people knew what the Fed was doing, they would worry, but most people don't know what the Fed is or does. This American Life (public radio) did a segment on "The Giant Pool of Money" where they investigated the financial mess. People don't know what a fiat currency is. To most people money is "real." Something they work hard for. That it is all a fiction, mystifies them to no end.
And if the Europeans weren't even more screwed up than we are, perhaps the Euro would be a good reserve currency. But it isn't. (The Euro is the 4th or 5th attempt at a monetary union in Europe since the late 1800s. They all ended badly.)
I think markets are rational in the sense that design is rational. As an engineer, I know I can look at things I did on previous designs and say, "well, it seemed like a good idea at the time". And that's for the ideas that worked in prototype development, not even including the ones that didn't make it to production because they wouldn't work reliably. In the same sense, I think most people in the market think what they did seemed like a good idea at the time.Delete
Henry Ford said, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." I think that some of what Bernanke has been up to in the last few years is trying to further obfuscate what they do, perhaps having a vision of himself on a lamp post.