“Rather than stimulating a real recovery by focusing on a strong dollar and market interest rates, the Fed's announcement today shows a disastrous detachment from reality on the part of our central bank.”
– Ron Paul
(Ed Note: Jack Crooks is this weeks Money Talks Guest)
- Troika could give Greece more time for reforms (Telegraph)
- Era of 'jobs-targeting' begins as Fed launches QE3 (Telegraph)
The Federal Reserve was set-up to disappoint; but they didn’t. And why would they have? Bernanke’s received more than a few pats on the back for his decisions to date:
“QE has made a massive difference,” said Tim Congdon from International Monetary Research. “If they had not done it we would have gone into another Great Depression.”
There were high expectations for Fed action yesterday. They delivered mostly at those expectations, except for one thing – they put no end-date on their operations. Twist ... to infinity and beyond.
And that may be the difference maker.
We’d seen several indicators and pieces of analysis to suggest Fed expectations were priced in. That may be true; and the price action yesterday (following the announcement) and this morning may be a blow-off squeeze of sorts. In the recent history of QE and Twisting, the rumors and expectations in the months leading up to the actual action have created the environment for risk assets to rally. These assets, however, have sold off in the periods after the actual action. It is the classic “buy the rumor, sell the news” dynamic.
As of now, that dynamic seems to make the most sense. The market is ripe for a downturn. But once that downturn runs its course (maybe lasting a month or so), there is little reason right now to expect anything but an extended uptrend for risk assets. Certainly this unlimited monetary accommodation will juice up inflation expectations and liquidity, justifying investments in commodities and stocks.
But what about the fundamentals? The Fed’s comments suggest there is nothing horribly worrisome about US growth potential, barring continued pressure on jobs. So has our fundamental analysis been horribly misguided? We don’t think so. Actually, recent Fed action seems to validate our pessimism. But our expectations for price action have been off target. Looking ahead, we are considering ways to hedge current bearish positioning. And unless a real crisis in confidence materializes soon, it will likely make sense to adopt a bullish stance on the markets. Stay tuned.