For the past few weeks we have provided ample evidence, mostly via private industry data and oration, that ‘green shoots’ are just another Bernanke equivocation and Street yearning.
We also opined that requisite ‘insider’ banks have fleeced patsies for necessary capital, so market beware.
Another of our themes is that the dollar, bonds and commodities keep checking the Fed across the big game board. And in order to avoid being checkmated, the Fed would have to sacrifice stocks.
The past week or so we have argued that this ‘second derivative’ rally, which is the latest permabull/Street shill euphemism for ‘dead cat bounce’, is occurring on very poor technicals. Volume is contracting, which is contrary to the start of any bull market. And leadership is by the misfits, which is never good.
In our June 16 letter we noted that technical indicators on the DJTA were declaring that its rally had ended; and because stocks were still in a ‘weekly’ sell, the daily ‘sell’ signals took on added gravitas.
Numerous pundits noted that insider selling had reached 2007 levels as did sentiment jigginess.
And finally, if all of the above escaped one’s consciousness, Goldman CEO Lloyd Blankfein, a week and a half ago, stated that this is not a recovery, the recession will be ‘long and protracted’, and any recovery would be ‘shallow’. Astute traders snickered that Goldman now had to be short.
Ergo, there have been enough warnings to induce the prudent to lighten up and move to the sidelines.
The FOMC Communiqué will be important only if it clearly indicates a significant change in policy. Anything else is a sideshow that will produce a fleeting effect on the markets.
So unless the Fed changes the table, the deflation trade is back in vogue. Stocks and commodities should fall; the dollar should rally. The big question is: will bonds rally or wallow?
Stocks sank on Monday on economic and FOMC fears. The World Bank said the global recession will be worse than it originally forecast. It now sees global GDP declining 2.9% this year. No green shoots here. (WSJ)
Yesterday’s missive contained several stories and some land transport charts that indicate the dead cat or the euphemistic second derivative rally, on massive monetary stimulus, is ending.
Investors and traders fear that the rift in the Fed over removing the Super Bowl-sized punch bowl could translate to a less accommodative FOMC Communiqué on Wednesday…We doubt it; Ben fears deflation.
The WSJ: Timing, Tools of Fed’s Exit Strategies Come Into Focus
The FT: Fed to confirm progress with a note of caution The Fed will attempt to play down market expectations of an early rise in US interest rates – futures markets are pricing in a rise as soon as February – will and repeat that inflation is not an immediate concern given the huge amount of spare capacity in the economy. Any change to the Fed’s policy of purchasing securities will probably wait until the autumn.
Ex-Fed Gov. Fred Mishkin: The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future…The increased supply of Treasury debt puts pressure on the Fed to buy it up.
Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward…leading to a serious problem down the road.
The Fed is boxed in. The slack in the economy that is likely to persist for a very long time suggests the need for stimulative monetary policy to lower long-term interest rates through the purchase of Treasurys.
The fiscal situation argues against this policy action, because it would weaken the Fed’s inflation-fighting credibility.
How can the Fed get out of the box and pursue the expansionary monetary policy that is needed right now? The answer is that the Obama administration and Congress have to get serious about long-run fiscal sustainability… (WSJ)
In other words, the Fed must construct a Goldilocks Communiqué on Wednesday or the markets will be very unhappy.
We found this Wikipedia entry for Fred Mishkin: In 2006, Mishkin co-authored a report called “Financial Stability in Iceland”. The report maintained that Iceland’s economic fundamentals were strong. The report was commissioned by the Icelandic Chamber of Commerce in response to critical coverage of the Icelandic economy and certain Icelandic companies in the international business media.
[Iceland had the biggest sovereign implosion to date.]
The Washington Post: Recovery’s Missing Ingredient: New Jobs; Experts Warn of A Long Dry Spell The likelihood of severe unemployment extending into the 2010 midterm elections and beyond poses a significant political hurdle to President Obama and congressional Democrats, who are already under fire for what critics label profligate spending. Continuing high unemployment rates would undercut the fundamental argument behind much of that spending: the promise that it will create new jobs and improve the prospects of working Americans, which Obama has called the ultimate measure of a healthy economy…
The dynamics of the modern economy further dim the employment picture. Job growth was weak for years after the past two recessions, in 1991 and 2001. Employers have grown increasingly slow to rehire workers, and steady advances in technology have allowed businesses to do more with fewer workers.
The SF Fed on the stimulus and recovery: “The uncertainty … remains high. Several economists remain skeptical that fiscal multipliers—whether from spending or taxes—are very large (see, for instance, Barro 2009). Moreover historical relationships may prove much less reliable during this downturn. Faced with a large decline in wealth and tight credit availability, households may very well respond differently to tax cuts today than they have in the past.” [Translation: “This time it’s Austrian” – as we have asserted for the past several years.]
Patsy alert! Reuters: Warren Buffett charity lunch bid tops $70,000
Calculate Risk skewers Harvard for its egregious housing forecasts in 2005 and 2006. The housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, the current slowdown should be moderate. [2006 report]