Submitted by Mark J. Grant, author of out of the Box,
I watched the business channels yesterday and winced. I cannot tell you how many times I heard that, "This was a great opportunity to buy." It is a great opportunity to buy I suppose if you are a masochist and enjoy people using a scalpel on your face. Maybe if you enjoy the pain it is a "great opportunity to buy" equities but that would be about it. For the rest of you I would suggest moving quickly to cash and maybe buying some debt where the cash flows at 6.00%-8.00% overcome the price of the securities. Bonds will eventually bounce back as the flight to safety intensifies but the timing of this is quite uncertain.
I was also astounded with the number of people saying that the Fed didn't say anything new. These people must be living in Borneo and far out into the jungle. The Fed came out and said as clearly as any Fed has ever said; "We are going to unwind the trade." Yes, sure, there was the usual huff and puff about a change in market conditions could change our viewpoint but that is not relevant. What was relevant is that the Fed stated and quite clearly that, "The party is over."
At every party there are two kinds of people. There are those that want to go home and those that don't. The trouble is that the ones that don't want to leave will lose money if they do so they try and extend the entertainment.
Now it has been a four year celebration and the last guests might leave at midnight or 1:00 A.M. so none of us are quite sure when they will stumble out but the host has made the announcement. Now it is time for everyone to get ready to go home. The latest announcement by the Fed was one hundred percent different than Bernanke's Congressional testimony and to not understand what was said will cost institutions billions of dollars and some people their jobs.
Yes, the biggest of American corporations have money. They did what they should have done during the process. They borrowed money very cheaply, the paid down debt, they bought back their equity and they took advantage of what the Fed had provided. Equities and bonds both rallied due to all of the liquidity. There is no other reason they rallied. None!
The money never made it to Main Street as exemplified by our growth rate and every asset class was buoyed and bubbled by just one single thing---lots of newly created money that had to go somewhere and so it did.
The markets will bounce on this day and that day and people will cheer but if you want the trend line, as necessitated by the end of the party, it is down.
Because we live in a global economy we will now also get impacted by China and Europe. The flow of money had protected our shores but now we will be exposed and the recession in Europe and the growth rate in China, probably around a real 3.5%-4.0%, is going to come bouncing into America. Liquidity has been the one and only god and the Fed has now told you that this god is going to close up shop.
It has been a great party. Enjoy the memories!