What a difference a day can make? Last week the world was consumed with fears of a slowing economy, weak demand and volatile markets. But that was "so last week."
As I penned this past Tuesday:
"In a more normal market, I would already be well convinced that the bullish trend had ended, particularly against the backdrop of an earnings recession and weak economic data. But this is by no means a normal market given the ongoing interventions by the Federal Reserve to support asset prices.
It is worth noting that contractions/expansions in the Fed's balance sheet have a very high correlation with subsequent market action as liquidity is pushed into the financial system. As shown in the chart below, the Federal Reserve has already once again began to quietly expand their balance sheet following the recent downturn. Not surprisingly, the market has responded in kind with the recent push higher. My suspicion is that if such minor interventions fail to stabilize the market, a more aggressive posture could be taken."
"Tomorrow, the Fed will announce their latest FOMC rate policy decision. My expectation is that they will once again forgo hiking rates with few changes to their verbiage of their decision. However, any indications that recent economic weakness will push rate hikes further into the future will likely be cheered by the "bulls" pushing the index back towards recent highs."
That is precisely what happened. Despite continued weak economic data, stocks soared toward market highs as the promise was made that "rates would be lifted in December."
The interesting part of this is that "tighter" monetary policy is not good for equities longer term. Furthermore, with economic growth at 2%, there is very little margin of error for the Fed with respect to monetary policy mistakes.
However, those are just my thoughts.
This weekend's reading list is a compilation of views, both "bullish" and "bearish" with respect to the Fed's recent rate decision, the markets reaction and the potential of future outcomes. The bulls are cheering, the bears are growling, but for investors the only thing that matters is how to position yourself for what happens next.
1) A Most Confused Critique Of The Fed by Lawrence Summers via Washington Post
“My friends Mike Spence and Kevin Warsh, writing in the Wall Street Journal on Wednesday, have produced what seems to me the single most confused analysis of U.S. monetary policy that I have read this year. Unless I am missing something -- which is certainly possible -- they make a variety of assertions that are usually exposed as fallacy in introductory economics classes.
My problem is not with their policy conclusion, though I do not share their highly negative view of quantitative easing (QE). There are many harshly critical analyses of QE, such as those of Martin Feldstein, which are entirely coherent and consistent with the macroeconomics of the last 50 years. My differences are based on judgements about empirical magnitudes and relative risks -- not questions of basic logic."
Read Also: An Unsteady Hand At The Fed by Desmond Lachman via American Enterprise Institute
2) Connecting The Dots by Market Anthropology
“Outstanding of Fed policy, a major near-term potential catalyst to help instigate a move higher in yields is the hint by Draghi last week of his willingness to advocate a material increase in the ECB's stimulus program. With some now speculating (see Here) - as we comparatively suggested in September (see Here), of more than doubling the initial size; it would follow the Fed's playbook of how they expanded (2X) and built out their own stimulus programs in March 2009.
Our general take on the intermediate-term effects - which have been borne out in the markets since 2009 (*including the ECBs initial salvo this March - Figure 2), is that QE has historically supported yields as investors are shaken out of the safe-haven corners of the government bond market and into more reflationary asset positions that invariably weakens the dollar (Figures 6 & 7).
Moreover, from our perspective - and despite conventional wisdom that sees a weaker euro as the best remedy for what ails Europe, we would argue that a broadly weaker US dollar would have the greatest efficacy in the long-term, as it could reflexively affect inflation expectations worldwide - most notably in emerging markets that the IMF estimates will account for more than 70 percent of global growth through the end of this decade.
Read Also: Dollar Breaks Out As Fed Stands Pat by Michael Kahn via Barron's
3) Four Takeaways From The Fed's Announcement by Mohamed El-Erian via Bloomberg
“Of critical importance to markets is that a decision to raise interest rates for the first time in almost 10 years is now more of a "live" possibility at the Fed's next policy meeting, in December. In reasserting this policy flexibility and making it explicit, the central bank refrained from providing specifics about the elements that would drive the decision.
The Fed's message conveyed greater unity among its policy-making officials. Only one member of the Federal Open Market Committee -- Jeffrey Lacker, the president of the Richmond Fed, dissented. The near unanimity was an important accomplishment by Chair Janet Yellen, especially given the range of views expressed in the weeks leading up to the meeting, including by the usually united governors."
Read Also: Fed Sets Stage For December Rate Hike by Brian Wesbury via First Trust
4) The Fed Lives In A Flawed Delusional World by John Curdele via New York Post
"Let me make a prediction now: The Fed won't have another chance to raise rates until seasonal anomalies in government statistics next spring make the economy look better than it really is.
But that's not the real story that came out of the Fed's policy-making meeting this week. This is: The Fed remains delusional.
In its statement, the Fed said the economy was expanding 'at a moderate pace' and 'household spending and business fixed investment has been increasing at solid rates in recent months.'
Solid? That statement stands in contradiction to retail sales reports, consumer spending, durable goods orders, consumer confidence surveys and a raft of other economic data."
Read Also: Just One Question For Janet Yellen by Tyler Durden via ZeroHedge
Read Also: 5 Bad Reasons To Raise Rates by Paul Kasriel via Advisor Perspectives
5) Rate Hikers At Fed Running Out Of Ammo by Jeff Cox via CNBC
Read Also: Yellen Has 6 Million Reasons To Wait by Craig Torres via Bloomberg
- Presidential Cycle Flashes Bear Signal? by Mark Hulbert via MarketWatch
- This Recession Indicator Hit A 6-Year Low by Akin Oyedele via Business Insider
- A Tale Of Two Recoveries by Jeff Snider via Alhambra Partners
- Debate - GOP Elevated, CNBC Eviscerated by David Stockman via Stockman's Contra Corner
- Are Share Buybacks Jeopardizing Future Growth by Tim Koller via McKinsey & Co.
- Don't Go For The Exacta by Cliff Asness via AQR
- A Different Perspective On Deviation by Greg Morris via Stockcharts.com
- Causes Of US Economic Stagnation by John Hussman via Hussman Funds
“It wasn't raining when Noah built the ark.” – Howard Ruff
Have a great weekend.