Mike Conlon
Senior Instructor
instructor@mywealth.com
Market tells Bernanke: Take a Hike!
When are low rates not a good thing? When you’re Ben Bernanke and you’re just wrapping up an FOMC meeting, that’s when. Much has been made of the inflation vs. deflation debate as of late, but at the end of the day neither will be seem important if investors have no confidence in our economy and in the guys who are supposedly in charge of it.
When the Fed announced on Wednesday that it would be keeping interest rates unchanged and that they were going to “stay the course” with their asset re-purchase program, it came as no surprise to anyone. And yet the stock markets sold off immediately. Now the market almost always re-acts to FOMC announcement day quite dramatically, but I don’t think the reaction was the one that Ben was looking for!
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(Don’t miss this….Chance to Win a Free Currency Course Bundle (valued at $1300) by Emailing Us Your Answer. 3 Names will be Randomly Picked and named as Winners!!. (Must be a subscriber) Some countries that export more than they import like to keep their currencies low intentionally, so their goods will be cheaper overseas. Which of these countries/regions would benefit the most from a weak currency? A) U.S.A. B) Canada C) Japan D) UK E) Euro
From the Fed release, “The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.” Under normal and credible conditions, this statement would be a slam-dunk for stocks and yet we sold off. Let’s take a look at what real traders know and what Bernanke is trying to get you to disbelieve.
The markets hate uncertainty! In the statement, the Fed did not mention an exit strategy for how and when they plan to remove monetary stimulus. This tells the market that perhaps we’re not out of the economic woods yet, as others might have you believe. The fact that there was no mention of it at all means that 1) it will most probably be a long time before the stimulus can be removed or 2) they may not have a plan at all!
Flight to “safety”! Because of this uncertainty, we saw a move back into the US dollar in the flight to safety trade. Whenever there is market uncertainty, money will flow out of the more speculative currencies and back into the US dollar. This move was NOT because investors are seeing strength in the US economy, but rather the exact opposite!
Green shoots have vanished! Going into this meeting, there was some speculation that inflation was starting to happen and that the economy had bottomed and was starting to turn around. If this were the case, traders would have expected Big Ben to mention the recovery and the exit strategy from the extreme measures they have taken to jump-start the economy. Like a possible rate hike in the near future. But it didn’t happen. This means that we are NOT as far along in the recovery process as investors had hoped. Cue the stock sell-off.
Inflation is tame, well sort of! Bernanke actually did note that commodity and energy prices have risen recently, but is saying that the outlook for inflation is tame. Well if you compare oil prices to their highs of $147 then oil doesn’t seem inflationary. But if you compare it to oil in the high $30’s, then it does seem inflationary. So which is it, Ben? The fact that he mentioned it but did not quantify the statement has lead to further uncertainty.
It’s really pretty simple. The markets can handle a bit of inflation. They can also handle a bit of deflation. What they can’t handle is the uncertainty of how this Fed views each condition, and how it is going to react. While market participants are known for being impatient, this may have been the one time when giving a little would have meant a lot.
If you want the markets to be stronger, then you have to project strength and not weakness. I’m not sure that Ben has “gotten it” yet as he sticks to his “just the facts, ma’am” approach. Let’s just hope that this doesn’t have the opposite effect.
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