In Monday's Rap I noted that I saw no proximate cause for that day's rally, but perhaps today's news (last night's, actually) offers us a clue. Some may have had an inkling of what was contained in this morning's Wall Street Journal, where an above-the-fold headline on the front page read, "Fed Mulls Symbolic Shift," followed by the drop head, "Officials to consider putting more money into bond market as recovery wavers."
How much of Monday's worldwide rally was precipitated by the actual knowledge that the Fed is about to do something, versus the hope that it will, I have no idea. It does seem, given today's article, Bullard's paper released last week, and his subsequent marketing campaign, that the Fed is going to "do something" at the next FOMC meeting. Of course, its actions will likely be predicated on the next employment number, making it almost certain that Friday will be a wild day in many markets, especially if that monthly guess regarding jobs "growth" is remarkably different from the loss of 60,000 jobs that is expected.
Mind the (Credibility) Gap
Taking a step back, I still find it rather remarkable that the Fed has any credibility whatsoever. After fostering two bubbles and not understanding anything about either of them, people still believe that the Fed knows what it is doing. As the WSJ article points out, it was only about four months ago that the Fed thought it could exit its quantitative easing program, and now it is looking for ways to restart the process.
Many of us were dubious of the Fed's exit strategy, knowing that what it had done so far had not changed the underlying dynamics of the economy or employment because of the bubble that came before. Our central bank's entire premise of bubble management is flawed; it doesn't understand that once a bubble has occurred, long-lasting damage is done, and the only real solution is to prevent them in the first place. But that will be a battle and a conversation for another day. For now, we're stuck with the Fed we have, and our job is to anticipate its errors and their ramifications.
As for today's market action, the indices opened modestly red before losing half a percent by mid-morning, but were back to even at midday. The early afternoon saw another selloff and with two hours to go, when I had to leave, they were a bit less than 0.5% lower. Trading turned quite dull, as if folks were already just waiting for Friday's data.
Away from stocks, the dollar was mixed, treasuries were higher (as they continue to drool over the prospect of more Fed buying). Oil was slightly higher, as were the metals.
The Chinese Gold Standard: Some Dissembling Required
On the subject of gold, there has been no shortage of stories over the last year or so from various honchos in China saying that it has no interest in using its green paper reserves to buy gold. However, that country does seem to go out of its way to promote gold demand internally and production worldwide, as these two articles from Bloomberg indicate: "China Plans to Help Bullion Producers" and "China to Further Open Local Gold Market."
In my opinion there can be no doubt that China understands the desirability of accumulating gold--as do the Russians, for that matter--and will continue to do so as best they can, while denying it as often as possible.
