Fed Continues To Breed Uncertainty
The Fed's policy statement this past Tuesday, August 10, 2010 did little to alleviate any double-dip recession concerns. In reality, it may have fanned the fires and fears of an economic downturn. The FOMC decided to keep the Fed’s balance sheet at the same level, re-investing maturing MBS in Treasuries.
I think the Fed has known for quite some time the real possibility of a double-dip recession or deflation. Deflation certainly is on the mind of James Bullock, the St. Louis Fed President as he has been sighting a potential Japan style deflation scenario playing out here in the US. Deflation is not a new word to PSTL. Deflation is rare, but can devastate an economy when it does occur.
We believe the Fed, in general, has played nothing other then pure politics and has avoided talking about the real reality of the economy, trying to put a positive spin on it, suggesting growth would remain modest. Almost as though they were trying to bate the American public into spending and bate Corporate America into hiring.
President Obama and his administration have done their share of cheer-leading as well.
Market players all over the world are feeling a renewed, heightened level of uncertainty. Why wouldn’t they?
The Treasury markets continue to strengthen in price with the 10-year yield closing this past week, August 13, 2010 at 17 month lows, 2.688%. Yields continue to drop even today, Monday August 16, 2010, getting as low as 2.572% in trade.
Who’s Telling The Truth, Stocks or Bonds?
Recent earnings and loads of cash on Corporate Americas balance sheets are keeping stocks afloat, at least for now. How long can that continue without seeing top line revenue growth?
The real question is who is telling the truth about the economy? Stocks or bonds?
No one can be certain, but we will air on the side of bonds. Bonds have been speaking loudly of troubling times for the past 3-4 months. I have also noted in several recent editorials the relationship between stock prices and the 10-year note yield. Once again let’s look at the numbers. The DJIA closed 2009 at 10,428 with the 10-year yield at 3.84%. Now, we have the DJIA closing this past Friday, August 13, 2010 at 10,303 with the 10-year yield at 2.688%. Something looks very wrong with this picture. Yields significantly lower and stocks lower by only 105 points.
The bond market is comprised of savvy investors that focus exclusively on the economic conditions and what the Fed is saying.
The stock market, on the other hand, represents an array of investors who are making wagers in essence about the price of stocks. Not to mention, you have fund manager trying to prop stocks for performance so they get their year-end bonuses.
Also, there is much confusion as to what type of PE (price to earnings ratio) one should apply to stocks in this type of environment.
Here at PSTL, we believe the bond market players are in a far better position to correctly discount future events since the Fed is involved in making decisions that effect the economy. We decidedly think the bonds are telling the truth about what is coming.
Does the Fed Really Have Any Bullets Left?
Does anyone really know? I don’t think anybody does, not even the Fed. Sure, they might have a few bullets left, but I think the realization is beginning to set in. The Tsunami might be in motion with no stopping it.
Re-inflating our way out of this mess is probably not going to happen, although; make no mistake about it, the Fed and Ben Bernanke will do their best and turn on the printing presses and drop money from the sky if they have to.
Bottom Line:
Day by day I think the general public is realizing we are in deep, deep trouble.
While we might get a sea change to a degree in the November elections and have the Bush tax cuts extended (set to expire at the end of 2010), the Tsunami might already be set in motion with NO stopping it. You can reference my editorial from June 1, 2010, Is the Next Economic Tsunami Upon Us?
State and Federal debt continues to explode with no slowing in site.
The job picture looks very bleak. Corporate America has no desire to hire and why should they? The Obama Administration is anti-business and the new health care plan is causing some business to actually close shop.
The housing market continues to tank and looks terrible as banks have no desire to lend.
Also, we should note, the consumer is in a MAJOR de-leveraging mode that will continue for the foreseeable future.
Here at PSTL we still think the three D’s are in play and some nearing the tipping point, DEBT ISSUES, DEFLATION, and DEPRESSION.
Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcasts to be vigilant in this continued complex market environment. We teach our members how to protect their portfolios and actually capitalize and make money in a declining market. We believe for the foreseeable future all rallies will be false and abortive in nature and all MAJOR risks are to the downside.
