Media Deja Vu, The Federal Reserve And The Stock Market Rally
On Friday before the market opened, I wrote 'It also coincides with with what could be a very short term low either today or Monday. So, if we do get a minor rally, we'll get t0 read journalists say it was because of the Fed in their usual correlation equals causation reporting.' Lo and behold, the media followed through with their usual headlines. The reality is this rally was set in motion before the Fed ever woke up on Tuesday. The Fed announcement may have added more exuberance but we had a retest of the January lows, astronomical put/call ratios & TRIN readings and an alignment of bearishness readings across a few other proprietary short term oversold data points. All of those issues begged for a rally. In fact, I don't think we've been so short term oversold by so many measurements this cycle. That said, it was a very atypical attempted rally and as many other very oversold rallies, appears to be very short.
I'm rather surprised at the amount of indignation I read surrounding the Fed's actions earlier this week and in general. We've talked on here that the Fed doesn't control and can't save the economy but that doesn't mean they have no impact. My perspective is we should encourage experimental solutions that may make positive impacts on the economy. Allowing banks to raise capital is one such positive impact. Even though I disagree with how many are doing so including ramming commodities and other nontransparent methods. It's too late to fret over corporate welfare policies and mistakes that were made. On some level, we must put these issues aside in the hopes these institutions regain some level of health. There will be plenty of post mortems on mistakes and how not to repeat them as happens in every crisis. Right now solutions are what should be in focus. That means looking at the big picture. No one wants the world to end in disaster or personal financial ruin simply to make sure bankers get their comeuppance. In other words, our banking system isn't really based on the concept of free markets and expecting the market to solve all of the problems could be expecting too much. A washout in the banking system without ultimate intervention if things roll off of a cliff might cleanse excesses but it could also lead to economic devastation.
We will have enough problems to deal with as this cycle ends and if the Fed or anyone has creative ideas or methods of helping banks regain some measure of health, why would we not want them attempted? Even if it only delays the inevitable. Delaying the inevitable might allow consumers to raise cash to weather a downturn more effectively, corporations of all types to do the same, policy meant to assist with social, economic and transparency issues to be formulated and the economy to work off some imbalances all while maintaining a higher level of employment. Are those not all good things? There is always a chance some of these issues can be partially mitigated or that the financial system can work through some of its issues before the world economy hits the wall. And, if the U.S. can improve its economic situation before that happens, it is better for everyone everywhere. Because whether anyone likes it or not, the world is overly reliant on the U.S. Quite frankly, because most of the world won't undertake their own economic and political reforms as it's too easy to mooch off of the U.S. In other words, the coming emerging markets bust will be of their own making. But, then we beat this drum like a rented mule.
One person or a small group of bureaucrats can't control an economy with trillions of moving parts but so far the Fed has managed to help avert total disaster. Although there is growing evidence we are very close to the edge. They have done so in part by letting the dollar slide. I am quite confident this action is deliberate because I've listened to some of Bernanke's public speeches and testimony. He has talked about the U.S. refocusing its efforts on exports. The implication to me is in lieu of consumption. In fact, I believe the Fed is taking queues from prior economic disasters and letting the dollar slide in an effort to mitigate negative outcomes. Yes, the Treasury is responsible for dollar policy but there is no doubt cooperation on strategy. While it may seem bizarre to say so at this time, I firmly believe there is ample evidence the U.S. has high odds of coming out of this cycle in the best economic position comparative to most as I have written numerous times. One thing I am sure of is the U.S. has not lost its comparative economic leadership. Not even close. Not because of some silly notion that I live here either. This doesn't mean I'm predicting a return of Goldilocks. Far from it as I wrote in my market projection post last week. There are large problems to be dealt with but they are not impossible. And, they are drastically less significant than those facing other major economic powers. And, our economic, social and political system allows us to more effectively deal with problems. Or more importantly, forces us to deal with problems when they become a crisis.
Even though I believe macro events are still setting up for a lengthy dollar rally, a weak dollar has kept many American industries humming alot longer than I anticipated--possibly less because our goods are cheaper and more because it has stoked the emerging market bubbles--and employment higher than expected as well. (On a shorter term note, I'm still not convinced this Euro breakout isn't a false one.) Many of the Bernanke detractors likely don't understand half of what he is doing anyway. Mostly because I read their commentary and realize they don't know what they are talking about. Not that anyone has all of the answers. I surely don't. But, not knowing the answers doesn't mean I can't spot many senseless remarks. You may dislike the Federal Reserve, you may believe we should have a different money policy, you may have many legitimate concerns with the current system. But, for now, it is what it is. And most don't understand the implications of changing it. Put another way using a metaphor I was reminded of as a young sales person; "We have oranges to sell so your job is to sell oranges.". The Federal Reserve and current monetary system is what we've got so our goal should be to make it work as best it can under the current circumstances. That being the case, to date, Ben Bernanke gets high marks in a nearly impossible environment. I wouldn't say the same for the Treasury and the repeated public gaffes by Paulson. But, now it appears Paulson is gaining some recognition of the economic severity as well as some political legs underneath him. Then again, the President still seems to be in denial. At least in public. I wrote about this in the fall of last year. Do we want straight talk from leadership or happy talk? In a transparent society where officials are the appointed stewards of its citizens, we deserve straight talk. It is our government and those said stewards that work for us not above us. Americans are smart enough to know something serious is going on whether they understand CDOs or not. We cannot address solutions to the issues without honest appraisals and acknowledgement of said issues. Failure to honestly assess the issues will ultimately lead to greater crisis.
I'm rather surprised at the amount of indignation I read surrounding the Fed's actions earlier this week and in general. We've talked on here that the Fed doesn't control and can't save the economy but that doesn't mean they have no impact. My perspective is we should encourage experimental solutions that may make positive impacts on the economy. Allowing banks to raise capital is one such positive impact. Even though I disagree with how many are doing so including ramming commodities and other nontransparent methods. It's too late to fret over corporate welfare policies and mistakes that were made. On some level, we must put these issues aside in the hopes these institutions regain some level of health. There will be plenty of post mortems on mistakes and how not to repeat them as happens in every crisis. Right now solutions are what should be in focus. That means looking at the big picture. No one wants the world to end in disaster or personal financial ruin simply to make sure bankers get their comeuppance. In other words, our banking system isn't really based on the concept of free markets and expecting the market to solve all of the problems could be expecting too much. A washout in the banking system without ultimate intervention if things roll off of a cliff might cleanse excesses but it could also lead to economic devastation.
We will have enough problems to deal with as this cycle ends and if the Fed or anyone has creative ideas or methods of helping banks regain some measure of health, why would we not want them attempted? Even if it only delays the inevitable. Delaying the inevitable might allow consumers to raise cash to weather a downturn more effectively, corporations of all types to do the same, policy meant to assist with social, economic and transparency issues to be formulated and the economy to work off some imbalances all while maintaining a higher level of employment. Are those not all good things? There is always a chance some of these issues can be partially mitigated or that the financial system can work through some of its issues before the world economy hits the wall. And, if the U.S. can improve its economic situation before that happens, it is better for everyone everywhere. Because whether anyone likes it or not, the world is overly reliant on the U.S. Quite frankly, because most of the world won't undertake their own economic and political reforms as it's too easy to mooch off of the U.S. In other words, the coming emerging markets bust will be of their own making. But, then we beat this drum like a rented mule.
One person or a small group of bureaucrats can't control an economy with trillions of moving parts but so far the Fed has managed to help avert total disaster. Although there is growing evidence we are very close to the edge. They have done so in part by letting the dollar slide. I am quite confident this action is deliberate because I've listened to some of Bernanke's public speeches and testimony. He has talked about the U.S. refocusing its efforts on exports. The implication to me is in lieu of consumption. In fact, I believe the Fed is taking queues from prior economic disasters and letting the dollar slide in an effort to mitigate negative outcomes. Yes, the Treasury is responsible for dollar policy but there is no doubt cooperation on strategy. While it may seem bizarre to say so at this time, I firmly believe there is ample evidence the U.S. has high odds of coming out of this cycle in the best economic position comparative to most as I have written numerous times. One thing I am sure of is the U.S. has not lost its comparative economic leadership. Not even close. Not because of some silly notion that I live here either. This doesn't mean I'm predicting a return of Goldilocks. Far from it as I wrote in my market projection post last week. There are large problems to be dealt with but they are not impossible. And, they are drastically less significant than those facing other major economic powers. And, our economic, social and political system allows us to more effectively deal with problems. Or more importantly, forces us to deal with problems when they become a crisis.
Even though I believe macro events are still setting up for a lengthy dollar rally, a weak dollar has kept many American industries humming alot longer than I anticipated--possibly less because our goods are cheaper and more because it has stoked the emerging market bubbles--and employment higher than expected as well. (On a shorter term note, I'm still not convinced this Euro breakout isn't a false one.) Many of the Bernanke detractors likely don't understand half of what he is doing anyway. Mostly because I read their commentary and realize they don't know what they are talking about. Not that anyone has all of the answers. I surely don't. But, not knowing the answers doesn't mean I can't spot many senseless remarks. You may dislike the Federal Reserve, you may believe we should have a different money policy, you may have many legitimate concerns with the current system. But, for now, it is what it is. And most don't understand the implications of changing it. Put another way using a metaphor I was reminded of as a young sales person; "We have oranges to sell so your job is to sell oranges.". The Federal Reserve and current monetary system is what we've got so our goal should be to make it work as best it can under the current circumstances. That being the case, to date, Ben Bernanke gets high marks in a nearly impossible environment. I wouldn't say the same for the Treasury and the repeated public gaffes by Paulson. But, now it appears Paulson is gaining some recognition of the economic severity as well as some political legs underneath him. Then again, the President still seems to be in denial. At least in public. I wrote about this in the fall of last year. Do we want straight talk from leadership or happy talk? In a transparent society where officials are the appointed stewards of its citizens, we deserve straight talk. It is our government and those said stewards that work for us not above us. Americans are smart enough to know something serious is going on whether they understand CDOs or not. We cannot address solutions to the issues without honest appraisals and acknowledgement of said issues. Failure to honestly assess the issues will ultimately lead to greater crisis.
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