Good Evening: U.S. stocks traded both higher and lower in a fairly narrow range on Wednesday before finishing mixed. Investors spent much of the day with their heads on a swivel, trying to sift through various news reports that were alternately deemed negative and positive. One minute Greece was reported to be the recipient of a bailout; later the story would be denied. In prepared testimony before Congress this morning, Chairman Bernanke mentioned the possibility of the FOMC soon raising the discount rate, but he then reiterated the Fed’s January statement that the fed funds rate is likely to stay at or near zero for “an extended period”. The conflicting headlines, as well as a blizzard in the northeastern U.S., eventually caused market participants to sit back and wait for more information. Ultimately, decided investors today, Bernanke’s testimony was just talk; the real action will come later this week as the EU tackles the messy situation in Greece.
Not much happened overnight or in the pre-market hours after dawn. S&P futures didn’t stray too far from unchanged, even after a much larger than expected U.S. trade deficit figure was released this. It was “all due to oil”, ran the dollar-bullish consensus thinking. What’s unfortunate about rising oil volumes and prices is that, unlike stimulus packages that we can put on the national credit card and pay back with freshly printed greenbacks, oil imports require payment — in full — with actual dollars coming out of U.S. wallets. Where those dollars finish their journeys is out of our hands, but they don’t cause deflation in the nations that receive them.
Stocks opened on a mildly positive note, with various stories making the rounds that some form of assistance would soon be on its way to Athens. Thirty minutes into the session, however, equities surrendered those gains. Chairman Bernanke’s testimony for lawmakers on Capitol Hill quickly created the threatening discount rate headlines you see below. Equities dropped almost 1% in response, while the dollar firmed up and the metals back-pedaled. When the rest of the text was parsed, however, the “Fed will soon tighten” alarm was called off, and stocks regained the unchanged mark just as New Yorkers trudged through the snow for lunch. As it raised travel times, the northeastern snowstorm also lowered trading volumes.
Stocks wandered mostly sideways for the rest of the day, finishing on a mildly sour note. The Russell 2000 managed to hold on to fractional gains and the Dow Transports gave up 0.35%. The other indexes ended Wednesday somewhere in between. Treasurys finished lower after a weak 10 year note auction, and yields climbed 3 to 6 bps this afternoon. The dollar visited both sides of unchanged before finishing with a modest gain, but it should be noted that bullish sentiment for the buck is rising almost as fast as long positions are being accumulated in our nation’s currency (see below). Contrarians take note. Commodities shrugged off the gyrations in FX, and another uptick in grains more than offset further weakness in precious metals. The CRB index rose 0.4%.
There appears to be a little smugness emerging among those investors who prefer U.S. dollars and U.S. fixed income securities over just about any southern European fixed income security denominated in euros. Certainly the news flow during the past couple of months has buttressed this confidence, since the profligate nations of Greece, Spain, and the other PIGS have struggled to finance themselves without the access to the magical force known as the printing press.
Like the other EU nations, Greece and the other spendthrifts agreed to subjugate their monetary policies to the ECB. It left them without the governmental escape hatch known as currency devaluation. I don’t know how the situation in Greece will be resolved, but I do know two things: Whatever course of action is chosen by EU member states, it will be painful for Greek citizens and a challenge to the unity that gave birth to the EU and the euro. And although the differences outnumber the similarities, the problems facing Greece and other EU member states are not unlike the pains of transition facing these United States under the Articles of Confederation.
Once the 13 colonies won their independence from England, their distrust of central authority and intention to preserve sovereignty at the state level led them to form a weak confederation of states whose bickering differences left our federal government in need of overhaul. The arguments continued during the Constitution Convention that followed, but the resulting Constitution and Bill of Rights were more than worth the bother. Conceived during a period of relative tranquility, the European Union is now facing a baptism by fire. But, as Bill Fleckenstein has mentioned more than once in his insightful daily Rap, Europe is trying to enforce some discipline among its member states, and “they at least have rules” for doing so. With proper leadership, these tribulations could wind up being the young EU’s finest hours. Or, divided against itself, perhaps the EU cannot stand. Only time will tell.
Contrast this search for discipline in Europe with Washington’s (and London’s) approach to problems in recent years: 1) willfully ignore them; 2) bail them out; 3) lower rates & print money to ease the painful transition; and 4) hope they go away. Chairman Bernanke’s testimony today was the perfect public face for this process. He has the daunting balancing act of trying to find a monetary policy that keeps stock, bond, and dollar investors all happy — not an easy chore when the bullish case for each implies different macroeconomic conditions.
For Mr. Bernanke’s apparent solution, let me again turn to Mr. Fleckenstein. He says the Fed will be “talking tough and acting easy”, at least until their credibility runs out. His description of the Fed’s predicament reminds one of the relative who owes you money, keeps swearing he’ll pay you back, but somehow the money never reaches you. Mr. Bernanke has succeeded thus far, but the day is fast approaching when one of these markets balks. Continuing to appease the stock market with a zero funds rate may cause either bonds or the dollar to reverse, while any further quantitative easing intended to suppress interest rates will undermine our currency. While it seems easier in the short run, trying to please everyone is likely — eventually — to end badly. History has not been kind to appeasement policies.
— Jack McHugh
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