The markets have been interesting lately, to say the
least. At the June 19 Fed meeting, Chairman
Bernanke indicated that a strengthening economy would cause the Fed to ‘taper’
its bond buying activity commonly known as QE3 (Quantitative Easing 3, no one
really remembers QE1 and QE2 because they really didn’t work.) The Fed Chairman then proceeded to repeat a
statement almost verbatim that he had said in several previous press
conferences. As the economy got better,
the Fed would not need to keep pumping money into the system. I likened it to the doctor saying, ‘As your
hip gets stronger, we can wean you off of the pain medication’.
Well, the last thing the market wanted was to be weaned off
of pain medication, despite the fact that the doctor did not actually do any
weaning, but merely inferred that said weaning might take place. The stock market plunged, the long term bonds
plunged (we have almost no long term bonds, thank goodness), gold plunged. Our take?
Complete overreaction. But weird
overreaction, not unlike the strange under reaction of the first five months: all
bad news – sequester, terrorist attack, North Korea, Cyprus and the market
soars. Good (or maybe even just neutral)
news, as the economy gets better, the Fed will quit injecting dollars to prop
it up and the market tanks.
So what is the reality?
All the world’s central banks are pumping money at high pressure and
volume to get their respective economies moving. That’s China, The ECB, the
Bank of Japan and the Fed. The dollar
numbers are mind boggling: the balance
sheets of the Central banks have gone from $10.4 Trillion in 2007 to $20.5 trillion
today. By my calculations, the balance
sheets of the Central Banks are equal to 30% of the world’s GDP! So, the question is: if the treatment is working, don’t we want it
to eventually stop? In other words, if
the easing stimulates the economy, then don’t we logically want to get off of
the QE drip?
Irrational market behavior is nothing new. Our approach is to maintain a cautious
allocation and keep our mix properly balanced.
We hope the Chairman is right in his view that the economy is continuing
to improve. The Sequester has done
wonders to the deficit: It’s gone from
well over $1 trillion to around $642 billion.
The deficit was 10% of GDP in 2009, and is now rapidly approaching
2%. (Funny how Congress and the President
can really work together by doing nothing.)
For now, we see continuing slow growth and hopefully a tapering of Fed
policy. And, it seems, we need some bad
news to stimulate the market…or do we need good news?
Happy summer,
Leon
