The other Chairman (of the fermentation committee) provides his unique color on the market's ability to shrug off the terrible news of the last few days thanks to the lesser-Chairman (of the Fed's) commitment to 'catch us if we fall' which has extended this rally for its fourth day-in-a-row so far. Critically UBS' Art Cashin opines on the tension between an entirely independent Fed and the pending election and the somewhat shocking statements from European Parliamentary President Schulz on the possible collapse of the European Union.
Bernanke Bounty Benefits Again - Chairman Bernanke’s commitment to “catch us if we fall” allowed markets to brush by several negatives and extend Wednesday’s rally into Thursday’s close. Thursday morning’s negatives were not insignificant.
A fairly upbeat earnings season ran into several big potholes. Exxon-Mobil missed most estimates. UPS, the exemplar of global business shipping came up short. Did that suggest a general slowdown?
Then Initial Claims hit, and hit hard. Once again they were over 380,000. That was the third week in a row and once again there was an upward revision. The four week (monthly?) moving average is at its highest level since the year began. The importance of claims is often lost in the media. A rise in claims is often mispresented as a slowdown in hiring. It is, instead, a pick-up in firing. It’s tougher to wrap warm weather around that.
As stunning as the claims data was to traders and economists, the markets seemed to shrug it off, just as they had dome with the negative earnings surprises.
The shrugging did not stop there. Over in Europe, Spain was put back on the rack. Most days that would have started a flight to safety in the dollar, sending stocks in the U.S. lower. Not Thursday, however.
The Fed And The Election - We had hoped to explore some of the problems facing the Fed in an election year. Perhaps next week when we can do it in proper detail. For today, let’s do a Readers Digest summary.
There are four more FOMC meetings before the Presidential election. Mr. Bernanke feels the recovery is vulnerable and says he stands ready to intervene again. If that intervention were to come coincident with some poll swings, the Fed might be charged with being political and/or partisan.
To avoid that, the Fed might revert to a pre-announced mechanical “trigger” for intervention. If they turned the decision over to an algorithm or something like the Taylor rule, they could avoid the partisan charge.
They have several options for a possible trigger. We’ll try to get to them next week.
A Still Restive Europe - The President of the European Parliament caused a bit of a stir yesterday when he talked of the possible collapse of the European Union. Here is one of several reports, this one from Stratfor.
European Parliament President Martin Schulz said Thursday that the collapse of the European Union is a realistic scenario. According to Schulz, a disturbing trend toward "re-nationalization" and "summitization" has taken hold in the last few months, with heads of state and governments "arrogating more and more decisions to themselves, debating and taking decisions behind closed doors and in disregard of the community method."Schulz also characterized the Fiscal Compact as an attempt to bypass the Commission and Parliament in forging a fiscal union. Meanwhile, European Council President Herman Van Rompuy said in a speech in Romania that the "winds of populism" are threatening the open borders of Europe.
Stratfor goes on to strike an analogy that doesn’t fully fit (as they note):
National political leaders are bypassing the European Parliament and Commission for two reasons. First, because their positions depend on national political processes. Europe tried to combine national sovereignty with supranationalism. In practice, that means national electorates determine who governs and national governments are answerable to that electorate. The United States also began with an ambiguity concerning whether the federal or state governments were sovereign. The southern states seceded based on their understanding that sovereignty rested with the states. Only after a brutal civil war was the federal government affirmed as the ultimate seat of sovereignty.
This leads to the second problem. In the United States, plenty were prepared to fight and die to uphold either national or state sovereignty. For both sides there was a moral principle involved concerning the nature of the United States. Europe has a long history of citizens fighting and dying for the sovereignty of nations, but who is prepared to fight and die for the European Parliament or the European Commission?
Nevertheless, the struggle will continue - without the bullets, we trust.