Art Cashin FTW: "QE2 Is Beginning To Look Like An Open-Air Multi-Month Version Of The PPT"
Art Cashin is being extra nimble today. Nimbler than ever, in fact.
The Fed And The Election – Various pundits have cited various “messages” sent by the voters on election day. For Ben Bernanke there was only one message – “It’s up to you, Ben”.
Given the evident gridlock the election produced and the “stop spending” theme, there is almost no likelihood of any new fiscal stimulus package. Therefore, any attempt to keep the economy from stalling will have to come from the Fed and monetary policy.
The Fed is frustrated. They have kept interest rates at zero for many, many months but borrowing has not been increased. People continue to pay down debt rather than take on more.
It is becoming far more evident that the true purpose of QE2 is not to hold down interest rates. It is, instead, to raise asset prices, especially stock prices.
Since 1987, conspiracy theorists have maintained that the government operates a secret “plunge protection team” (PPT). Like most conspiracy theories, the PPT is hogwash and not much different from the guy who screams “the race was fixed” when his horse lost. I have listed the many reasons why the PPT is all smoke and mirrors over the years. So to save space, I won’t repeat.
That having been said, QE2 is beginning to look like an open-air multi-month version of the PPT. It looks like one of the primary assets the Fed wants to inflate is the stock market. That might produce a wealth effect as 401Ks heal and higher highs make the economy appear to be moving even as it plods along.
We’ll try to explore this further in coming days.
Meanwhile doubts about the efficacy of QE2 and the risks inherent in it continue to mount. Here’s a bit from Phil Izzo at the WSJ.com
QE2 Criticism: Martin Feldstein is worried about the effects of more Fed asset purchases. “The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy… Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar.”
Lots to stay nimble and wary about.
And the history lesson, is so very appropriately, about a circus:
AN ENCORE PRESENTATION
On this day in 1902, a company that would become an American institution began producing a product that became an American institution by copying part of an American institution. (What did he say??)
The company is one we now call Nabisco. The product we now call Animal Crackers. And of course, they were patterned and packaged to evoke the adventure and mystery of Barnum and Bailey's Travelling Circus.
Barnum of course was dead, dead as a doornail. (Whoops sorry...wrong story!) Anyway, although Mr. Barnum had passed on several years before, the circus that he had merged with James Bailey's Big Top was one of the biggest things in America in 1902. So the National Biscuit Company decided to combine the old European custom of cookies in animal shapes with the popularity of Barnum's circus. The plan was to make it a seasonal product - a Christmas treat.
So they packaged the little animal shapes in a box painted to look like a cage at the circus. Each box was labeled..."Barnum's Animals." And to allow parents to hang the box on the Christmas tree, they added that little white string. It was a pretty good plan for a seasonal product. Then...as so often happens in American business and politics...the public turned the plan on its head.
As soon as they got their boxes kids began sorting the animals to see what types there were. Since the boxes were filled at random, often you found several buffalo, or tiger, or zebra, etc. in your box of 22 crackers. But, by comparing with kids next door and kids at school, moppets soon discovered there were 18 different crackers and 17 different animals. By accident the random filling meant that you rarely got a complete set in one box. So you either trade at school (nah! you'll probably eat 'em on the way home) or ask Mom or Dad to "pulleeze" buy one more box.
Oh yes! Lest I forget there was that white string for hanging on the tree. Well in a gender-neutral way that today's sex police say is impossible - neither boys nor girls felt it was exclusionary. The girls used the string to make the box like a purse. The boys used the string to make the box like a toolbox. (That was clearly before we learned the danger of letting children use their childlike imagination.) At any rate, the National Biscuit Company found the immediate demand was so strong that Animal Crackers instantly ceased to be a seasonal item and became one of the best selling products in U.S. history. They became the source of a hit song for Shirley Temple and the title of a Marx Brothers movie.
Markets went a bit crackers on the Fed announcement as the tape demonstrated its historic tendency to confuse traders and investors.