Many hypothesized the financial markets were less than thrilled about the possibility of a Fed led by Larry Summers. The reaction in the futures markets Sunday confirmed the theory.
Following the leading indicators of employment have been great tools towards helping investors stay on the right side of the investment tracks, and why I check in on them from time to time.
Quantitative Easing (QE) involves pumping freshly printed electronic dollars into the hands of the Fed’s primary dealers in exchange for bonds. A bond is removed from the economy and new money is added.
Gold has been outperforming both stocks and long-dated Treasuries in recent weeks. Below are four possible scenarios for the yellow metal looking out several weeks.
Experienced investors know we are in an era where central banks are playing a much larger than normal role in the financial markets. The Fed has openly talked about money printing and asset prices during their unprecedented three rounds of quantitative easing (QE).
As we noted recently, the Federal Reserve has explicitly mentioned tapering in their recent communications, and President Obama has commented numerous times on avoiding another round of asset bubbles.
With the primary focus on the Fed, many market participants may have missed President Obama’s repeated calls for avoiding another round of asset bubbles.
The Fed has taken extreme measures to kick start the economy. With fears of inflating another round of asset bubbles increasing, public statements from Fed governors in recent weeks have revolved around tapering their stimulative policies in the months ahead.
We continue to believe (a) tapering is about bubble management, and (b) the base case is for a September tapering announcement from the Fed. However, the Fed wants to leave the door open to the “what happens if they don’t taper in September” scenario. Why?
Since the S&P 500 bottomed on June 24, the calls on Twitter for an imminent peak have been frequent. At some point a true trend reversal will come, but thus far Monday’s and Tuesday’s weakness can be placed in the normal volatility category.
After seeing stocks drop over 50% in both the 2000-2003 and 2007-2009 bear markets, investors are understandably hesitant to redeploy their hard-earned money back into stocks.
Wednesday’s trading session featured a 32 point zig zag affair intraday that resulted in almost no change vs. Tuesday’s session when the final 4 p.m. whistle sounded.
The purpose of Fed money printing is to help support economic growth and job creation. The negative side effects can be rising inflation or asset bubbles.
One of the many tenets on Wall Street is that debt investors are often a step or two ahead of stock investors when it comes to identifying slowing economic growth. From a common sense perspective, it makes some sense.
The equity side of Wall Street coined the term great rotation to describe what they hoped would be a mass migration by investors from bonds to stocks. Many investors have not forgotten when the S&P 500 plunged 50%-plus (2007-2009).
As noted on July 15, our guess is the tapering dialogue at the Fed is more about escalating fears of another round of asset bubbles rather than confidence in the economy or fears about escalating inflation.
What exactly does the expression don’t fight the Fed mean? The Fed wants to drive asset prices higher (stocks, housing, & commercial real estate). The Fed can create money out of thin air, which is a very powerful tool.
