The macro picture continues to drive the markets. Starting off with yesterday, the German court decision and the Reuters article indicating full EFSF (European Financial Stability Facility) approval by the end of September by all regions' parliaments on top of speculation of fiscal and monetary stimulus catalysts on Thursday lifted demand for U.S. and European equities. Today, a WSJ article discussed three options the Federal Reserve might be considering:
- “Operation Twist”
- Lowering rate paid on bank reserves
- Altering communication further (holding rates until a target is achieved)
Bernanke spoke today in Minnesota, to discuss more accommodation, but he didn’t reference any details as laid out in the WSJ article, which confused investors as to the legitimacy of the article.
Focusing on the longer-term prospects for the economy, Bernanke insisted that the long-run growth potential of the U.S. economy would not be harmed by the financial crisis and the recession if “our country takes the necessary steps to secure that outcome. Economic policymakers face a range of difficult decisions, and every household and business must cope with the stresses and uncertainties that our current situation presents…The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.” Bernanke 9/8/2011
So no real news today in Bernanke’s speech from what we had already heard at Jackson Hole. They want a new accommodative move because the market is crying out for one but no details were given today as to what that action might be. That causes some speculation as to whether the Fed already has a plan for one; or secondly, that there really isn’t anything else they can do. If you look at the three choices as laid out by the WSJ, none of those are a nuclear monetary stimulus attack as the case was for QE 1 and 2. Instead, it seems like over the past month, there continues to be an ongoing argument between Federal Reserve officials concerning just who’s responsibility it is to take the next step in stimulating the economy. Of course, we got some clear ideas from Charles Plosser just which economic policymakers Ben might have been referring to in his speech, here:
“Plosser said he sees a high bar to new Fed action. ‘Broadly speaking, there are two things the Fed should respond to,’ he said. ‘If there were some kind of financial crisis, like Europe, it would be appropriate for us to step in’ and be the lender of last resort. Also, if deflationary fears ‘became a real threat again, that would be a justification for the Fed to step in again.”
“I don’t see either one of those happening,” Plosser said. WSJ 9/8/2011
So the responsibility for creating economic growth is squarely being placed on fiscal policy with the Fed on standby. Sure the Fed will offer token accommodation, but we are likely not going to see a nuclear monetary stimulus attack with an elevated inflation rate. The Fed will meet for two days in September to really debate the matter, because they’re moving to smaller bullets and there are a lot of them to choose from.
Shifting the responsibility for stimulating the economy on the federal government is a risky business. We all remember why Standard & Poor’s lowered our debt rating. It was because the debt limit debate had shown creditors that the U.S. is in gridlock, or is slow to act. Tonight Obama will preset some ideas to Congress to stimulate job growth, and maybe jab at the Republican Party for hindering some of those measures. Both parties do not want the stigma of hindering the economy, but both parties are heading into an election year and the dirt slinging will get messy. Who’s to say anything will get done at all as both parties get more involved with politics and maneuvering instead of making good medium to long-term policies to stimulate the economy.
We have the catalysts for a dead cat bounce, but without a nuclear attack from the Federal Reserve Bank or from Congress, the likely outcome is a short-term rally that will give way to global recession momentum that is already kicking into gear in the economic indicators. Europe, while not in the heightened crisis mode it was in this weekend, has still a lot of unanswered questions regarding collateral for Greece creditors, bank capital issues, and whether countries will continue austerity measures in the face of social unrest to warrant financing support from the EFSF.
In Other News
The ECB met today and cut their GDP view citing “intensified downside risks” with inflation forecasts left unchanged. Concerning the bond purchasing facility, Trichet said the ECB would provide unlimited liquidity for banks.
Many are anticipating talk of a tax repatriation holiday in Obama's speech tonight. It’s thought that he would only allow this as part of a larger tax overhaul and possibly with constraints as to where the money could be spent (infrastructure). Interestingly, gold was up today while the Euro fell. This has not been typical of the relationship since April, which is to say that gold has been rising unrelated to currency issues, but more due to panic and fear of a sovereign debt collapse.
And yet in more news, the precious metal miners are breaking out of a long 10-month consolidation period. This is strategically important for the sector. Gold has had a month to cool down since reaching $1917 and it appears that money has been circulating into the miners. Relative strength is the process of dividing a security’s price by the price of something else. In this case, dividing the price of a miner by the price of gold gives you an idea of whether the miners are or are not outperforming gold. A rising trend tells you the numerator is outperforming while a falling trend tells you the denominator is outperforming. In this case, the miners have been underperforming gold since April, but have recently started a short-term outperformance while gold has consolidated under $1917. This could be a good time to jump in miners, for a short-term to intermediate-term bull run, but be on your guard for deleveraging across all equities should panic regarding sovereign debt set in as it did in the second half of 2008. The market is too volatile right now to sit on anything but bullion long-term.
That said, gold itself appears to be consolidating instead of correcting. Gold could have corrected in waterfall fashion as silver did when it too scored a parabolic move in the last month. Margin requirements have been hiked twice to cool down gold’s “un-orderly” climb from 50 in July to 17 in August. After a drop of 0 in three days, gold has retested its highs this week and will likely continue to consolidate under 1917 a little while longer. The technical chart is beginning to point towards a triangle with a 29 target after an upside breakout above 17. If Gold closes below 50, this would negate this setup.
