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Many stock market bulls consistently cite one force — and one force only — for their positive outlook. Federal Reserve policy. They say …
“Forget the fact the global economy is slumping from Europe to Asia” …
“Forget the fact the U.S. economy is slumping fast” …
“Forget the fact earnings stink!” and …
“Forget the fact the euro currency keeps falling to new lows, along with European peripheral bonds!”
Why, they say? “Because the Fed is going to save us and when it does, stocks will go up!”
It may be a comforting viewpoint. But I believe it’s also completely wrong — and I’ll tell you why!
The Sorry State of the Real Economy …
Fed Chairman Ben Bernanke went before Congress this week as part of his semi-annual testimony on the economic outlook. He didn’t mince words about the state of the economy, saying in response to questions that we were just “muddling through” while most of Europe was “already in recession.”
His prepared testimony went further, noting that GDP grew at a slower rate in the first quarter than in the second half of 2011 … and that the second quarter looks even worse. He also pointed out that payroll growth has plunged by 63 percent … that household confidence in future income remains low … and that business spending is waning.
Meanwhile, several other commentators are getting even more negative:
* The International Monetary Fund just cut its global growth forecast for 2013, citing Europe’s downturn and the slowdown in emerging markets.
* Goldman Sachs just slashed its U.S. GDP growth forecast for the second quarter to 1.1 percent from 1.3 percent, not very far from stall speed.
* Pimco’s “Bond King” Bill Gross just said the U.S. is “approaching recession when measured by employment, retail sales, investment, and corporate profits.”
* And a leading economist at the prestigious Economic Cycle Research Institute, Lakshman Achuthan, just said never mind what hyperactive stock traders say on CNBC. We’re already in a contraction!
… and What Bernanke Can’t Do about It
That’s a seriously broad-based indictment of the economic environment, with little reason to expect a turnaround any time soon. Yet stock traders have tried to ignore that fact, figuring Bernanke is in their back pocket.
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| This week, Fed Chairman Bernanke offered Congress his grim assessment of the U.S. economy. |
But let’s take a look at the remaining Fed “tools” Bernanke cited in oral and written testimony this week …
First, he said policymakers could cut the interest rate paid on excess reserves (IOER) the banks hold at the Fed. The idea is that doing so would prompt banks to lend out their reserve funds rather than just park them at the Fed for a few nickels and dimes.
The problem? The IOER is already a rock-bottom 0.25 percent. Cutting it by a few basis points to 0 percent will have practically no impact on the willingness of banks to lend. If anything, it could HURT the economy by driving money market funds out of business, draining a vital source of savings for economic expansion!
Second, he said the Fed could use “communications” tools to guide market expectations. That’s Fed jargon for promising to keep rates lower for longer than the current “at least through late 2014″ pledge.
But the fact is, nobody expects the Fed to do anything with the federal funds rate anyway! Plus, the Fed’s long-term projections have proven wrong so many times that a promise to hold rates low through 2015 … 2016 … or 2040 for that matter isn’t worth the paper it’s printed on. So that kind of move won’t help at all.
Third, Bernanke said the Fed could consider another round of quantitative easing, or QE. This seems to be the bulls’ biggest hope of all. They’re all assuming that as soon as Bernanke pulls the trigger, the stock market will be off to the races.
Look, QE1 came at a time when the lending rates were very high and the credit markets were in complete disarray. It was a brand new policy nobody expected, and it had a huge impact in terms of bringing down spreads, rates, and risk levels.
But QE2 was less effective in terms of impact because market dysfunction was already largely fixed and because the underlying economy was weakening. Moreover, other similar programs from the European Central Bank’s LTRO1 and LTRO2 to Operation Twist 1 and 2, have had even less of an impact than QE2!
Just consider: A Credit Suisse note from a few days ago chronicled the findings of several studies on the impact of QE on 10-year Treasury Note yields. Several researchers estimated QE1 lowered yields by around 90 basis points to 100 basis points. But they also concluded that QE2 moved rates by as little as 13 basis points!
That was the supposed impact on the financial markets. The impact of several hundred billion dollars worth of QE on the real economy — meaning GDP — was as paltry as 40 basis points. That’s the difference between 0 percent growth and 0.4 percent growth, a drop in the bucket!
Yet somehow we’re supposed to believe that QE3 — the THIRD iteration of a policy that’s having less and less impact on financial markets, not to mention a near-zero impact on the real economy — will somehow be different?
Is there anyone on the planet who really believes that 3.56 percent 30-year mortgage rates — the lowest in the history of the United States — are holding back the housing market?
Or that 1.45 percent 10-year Treasury Note Yields — also the lowest in history — are hindering the broad economy?
Even IF QE3 succeeded in lowering yields by another 10 or 20 basis points, can anyone seriously argue with a straight face that it will make a major difference on the financial markets or economic outlook?
I think those are bad bets to make. And that’s why I continue to remain cautious on most stocks and asset classes!
Until next time,
Mike
You are obviously dumbfounded by what’s been happening the last several years….
…and…your subscribers are paying a dear price for your ignorance and lack of understadning..
You have it all, oh, so wrong…
True. The real reason the stock market has held up is direct manipulation by the large financial institution using (our) Fed money. We no longer have a free market. It’s more like going to the craps table in Vegas than investing.
Da man, that’s really persuasive. If all of that is wrong, whats rights then ?
Da Man you laugh now. When you wake up and see what’s really going on, it will be too late. Mike’s job is to sound the alarm and he’s on point. I read him, not your lame objections.
Do you not realize with the market it’s always UP LIKE AN ESCALATOR, DOWN LIKE AN ELEVATOR. You can laugh all the way up, but, please, watch that last step.
here’s a factoid for ya, Collin, me rookie-boy…
Investors are more gullible when returns are low…
You wouldn’t/coldn’t possible begi n to fathom that becasue
1)..yer still young and dumb
2) You do no independent research. you young rookies are always looking for a short-cut.
I have forgotten more than you will ever know….mainly because you are lazy and do no qwork…
go for it Manuel
SEE THE PROBLEM is………….DA MAN goes by so many different names sometimes he is (da man) other times (da man of men) sometimes (francis) and OTHERS ……………… he brags about making 1000s of $ per month in rent, and a week and a half later he is bragging he is making TENS of $1000s per month, he always brags do the opposite of what weiss recommends i bet thats really worked out well for him , I remember not to long ago when weiss was telling everyone to buy natural gas or related companies. I was expected a break around 1.90 it broke a few pennies above that mealwhile francis and cristine are bragging how much money they are making shorting natural gas at the bottom but the only natural gas related company they could find was cheasapeake energy because they couldnt find any others, its a real smart play to short something on the bottom……….OH YEA heres a hint take the time to make a hard copy of all the stocks that trade in all the markets. The markets breaks down evenly into 9 broad sectors 31 basic sectors and 218 industrys all stocks fall into those categorys it doesnt matter where they trade pink sheet, bulletin board, s&p, nasdaq , nyse, or the dow. So make a hard copy have it right in your office all in descending market cap. and watch for the ascending market caps …….next learn fundamental analysis and make a hard copy for quick reference…………..then techinical analysis, make a hard copy,….when it comes to indicator analysis learn it absorb it and make a hard copy ………..find which indicators work best for you and how they work within each other , learn the formulas THIS IS A MUST and put this hard copy with the others but always withinn arms reach ……..when you finish with these learn charting analysis and make a hard copy. …….. IF you do this you wont make a dumb statement like cristine said that cheasapeake energy was the only natural gas company they could find…….So lets talk about the economy the U.S. national debt per taxpayer is nearing 140K but remember half of all taxpayers pay ZERO $$$$ so the real liability for the taxpayers who actually are paying taxes is somewhere around 300k PER TAXPAYER and that just on the national debt, it gets alot worse when state debt is figured in, so lets talk about foreclosures up over 9% nationwide and over 18% in california , it doesnt matter if your state uses judicial law or trust law…….. foreclosures are on the rise preforeclosures (lis pendens) are rising dramatically around 3-1 over foreclosures ….things are not getting better …………only if you believe the govt. manufactured numbers……… WE ARE NOW NEARING 16 TRILLION dollars JUST IN THE U.S. NATIONAL DEBT and its going to grow rapidly in the next few yrs… obama and company have a created a huge deficit every yr ………….always promising it will be the last… do you believe him ………..not a person I know does , the obama govt. have tried to manipulate the unemployment numbers they say 12,567,395 people are out of work its more like 23,054,410 see under the obama administration if your unemployed for a yr …………..your not even counted as unemployed anymore even though that person is still collecting unemployment benefits. Less and less jobs are being created with more people filing for 1st time unemployment for the last 3 months barely 75,000 people are finding work with 1st timers filing closer and closer to 400,000. THE U.S. Revenue/GDP ratio now stands at 32.42% WITH spending to GDP ratio at 44.02% this mean were heading for a fiscal cliff . … tax revenue is falling while govt spending is increasing . Interest rates are now the lowest in history every week rates going lower and lower and lowest 11 of 12 weeks …….lets face it obama promised a surging economy at growth of over 6% every yr during his tenure and now growth has been cut back to 1.1% for the rest of the yr…. wheres the other 5% he promised I remember obama bragged he needed to take over this economy the same day he was elected pres. I remember his exact words were LET SOMEONE WHO KNOWS HOW TO RUN A COUNTRY RUN IT ……….well apparently the only thing obama has ever run is his mouth…. obama is with out a doubt one of the best liars out there (francis you could learn alot from him) ooops I meant da man… oh well same person…. OH WELL………. on to something different OBAMA has a new way of accounting for inflation , according to the obama admin. inflation is negligible but if you use the same accounting methods that THE UNITED STATES USED all through the 80s and the 90s its more like 9.7% .Companies use creative accounting EBITDA or PRO FORMA when they should be using GAPP …….OBAMA and company use manufactured numbers on the economy and feed them to the market CREATING DIRECT MARKET MANIPULATION…….irelands external debt /GDP ratio now stands over 1255% england @ 493%, france @ 279% , portugal @ 260%, spain @ 235%, greece @ 226%, germany @ 210%, italy @ 165 %, I was talking with some friends from spain……… the govt. stats . are 25% unemployment there its more like 32% and now they have to cut spending while raising taxes when greece did the same their unemployment numbers skyrocketed so expect to see 50% or more unemployment in spain and riots. (*.*)
All this “knowledge” and still going broke, Thor?..
I didn’t know facts were bragging…or??..are you just a little sensitive…
you see….i agreew ith a lot you say….i just have a diferent gameplan because I understand….understand…understand what is going on and HOW TO PLAY IT…
marty and Mikey brag about knowing what is going on, yet, subscribers are leaving in droves wiht huge losses….SOMETHING IS WRONG WITH THEIR GAMEPLAN…
The irony..is…I have done practically nothing to make my money….NOTHING….haven’t sweated a thing….
the stock market is up over 100 % Thor….I’m so sorry you are still searching for an entry point and having to play options and use leverage….risky, risky, risky..
me??..just kicking back letting the checks roll in….fat divys from WF…did I mentions i have just under 25,000 shares at a dollar cost avg of under 9 dollars??
Didn’t do athing to build that except 3 clicks of my mouse…
but…i soooo dig your bitterness….
I can’t think of a thing that Bernanke has ever been right about. Why does he still have a job?
What’s going to happen then?
Of course,what the Fed does is important.They can and do create fiat currency at no cost.Stocks,bonds,real estate and everything else is priced in fiat.Bernanke once said he would drop fiat out of helicopters,if necessary,to stop any possible deflation.From what I’ve seen,of prices in supermarkets and dept stores,he has been successful in keeping prices rising/currency devaluing.So,we have the Bernanke put in place and no sign that most Americans want a change.The really scary part is that America,with a too powerful govt, is ultimately run by American voters,who are unqualified to be voting.They end up voting for the politicians who promise them the most “something for nothing”.Everyone thinks they can beat the system,in the short run and get more than the give.The result is huge govt deficits and the Fed monetizing those deficits.That’s what is driving overall prices of stocks,commodities and everything else up.I don’t see this ending.
The market has never been so manipulated .In my old country Belgium ,they were calling the manipulators ALIBABA AND THE 40 CROOKS .Of course Belgium was and is a small country.In the U.S.A. you have many more crooks .JJR
looks like its time to buy more gold and silver the dollar is dead….
So what is the solution – Easy to write about the problems.
What is the solutions – either way the Greeks and rest of Europe must pay for their mistake over the last 10 years. So does the American.
Whether its Austerity and the market gets killed or the false Economy that the US is inducing both must pay the piper
You must settle Debts – you can’t roll over debt endlessly until end of time.
The solution is to take interest RATE up, yes up – allow for real capital formation through savings – take the hard medicine but allowing Savers to Earn a safe Risk free return.
Hi Mike
It appears that true capitalists who produce things have left the process for the moment as the bureauocrats and technocrats are out of their depth trying to manipulate a correction to growth. It’s a B.S. market run by cheats and gamblers that will come unstuck one day. We the people, need real leaders with balls that give people hope. Not what we have at the moment. Vote none of the above.
why they want destroy fiat money what benefit for them?
The world economy is on track to a long period of deflation after decades of inflation as a normal business cycle. All the politicians and central bankers put together cannot turn the cycle, they can only make things worse by deploying methods to postpone the effects at a much bigger cost.
The debts taken in the name of the country for QE will have to be borne by the rest of the population and future generations in the form of higher taxes, austerity measures and higher unemployment.
http://www.marketoracle.co.uk/UserInfo-Akhil_Khanna.html
Hey, Thor….here’s a factoid right out of the headlines…so..it’ll be easy for you to digest since you do no research and need spoonfeeding..
“Home values rise for the first time in 5 years”…
Just like that….you’ve been passed by….and it has nothing to do with the governemnt you bray against…..its called…organic growth….but…you keep looking the other direction and I’ll keep making money my direction…
You have no clue how real estate can generate montains of wealth……if you ask nicely…I’ll let you in on some secrets
Hardee, har, har, har…
The Boy Blunder at his best….
Not a clue….I’ve tried helping him…but..he just doesn’t get it..
This should pretty much blow away any positions in SPXU..
Nice job, Boy Blunder, nice job…..
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