A hush comes over the crowd. All is silent in wait for the profundities the Fed is about to utter. Then comes the words - the crowd goes numb. In unison we hear a giant . . . Huh?
As feelings return to extremities, a murmur in the crowd increases in volume and then chaos erupts as investors run for the phones and computers to make some trades.
Some say the Fed has clearly lost confidence in their actions taken to spur the economy. It seems uncertainty has now driven the Fed to uncertainty. Back to the future we go.
As announced, the Fed intends to buy more treasuries and hold key interest rates near zero. There needs to be more lending, more borrowing and these actions are said to facilitate both. As the Fed buys more treasuries, this higher demand drives bond prices higher and yields lower.
David Rosenberg says, don't be surprised if we see 10 year bond yields drop to 1.5% with the long bond approaching 2%. Can you say 2% 30 year mortgage? In effect, when the well runs dry, dig it deeper. With jobs shrinking and economic growth not at all what it was cracked up to be just a few weeks ago, the pool of potential borrowers is also shrinking. It seems the only option the Fed has is to go back to those who can borrow and get them to borrow more.
In normal times, (whatever that was) lower borrowing costs tended to boost prices higher. This is especially true with housing. If this move by the Fed was intended to shore up a housing market still in decline, I'm curious how that is supposed to work when unemployment continues to rise. If borrowing costs go down but the price of the house goes up, what difference does it make to the person who has no job?
Talk about kicking the can down the road. This may serve to put a few extra bucks of disposable income in a few pockets but I doubt it's enough to rebound the largest economy in the world. Plus it doesn't necessarily create jobs. It just gives those who still have jobs something to do.
Even more disconcerting, though, to investors, may be the Feds sudden reversal of sentiment and assessment of the economy. We can thank David Rosenberg again for shedding light on these telling tales told by the Fed in just the past week. (Dave is Chief Economist and Strategist for Gluskin Sheff) Here are Dave's comments taken from Breakfast With Dave on August 11, 2010.
It was just over a week ago that Ben Bernanke told us that rising demand from households and businesses should help sustain growth ... growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions.
Meanwhile, yesterday's FOMC press statement read like a retraction: Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit......the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
It's hard to imagine only a one week span between those comments. So what changed Bernanke's view? A question Dave Rosenberg asks as he provides a multiple choice of potential answers. Here they are . . .
Was it Bullard's (St. Louis FRB President) comment that the United States is closer to a Japanese-style outcome today than at any time in recent history?
Was it the 159,000 slide in Household employment in July, the third decline in a row? Ninety-eight percent of the time, we are either in recession or about to head into one when this happens.
Was it yesterday's news that labour compensation per hour deflated at a 0.7% annual rate? Only the third time this has happened in the past six years.
Was it the fact that chain store sales came in below plan for four straight months in July and that two-thirds of the retailing community missed their targets?
Or could it be that the plethora of small businesses who don't share the Fed Chairman's recovery view inundated him with angry phone calls asking him what planet he was from?
I'm not so sure it's a matter of changing his view as simply a matter of getting caught hiding his views. 25 million unemployed and underemployed workers know what's going on out there and those still working don't have to be experts to see what's going to happen when taxes rise, health care costs skyrocket and even more jobs are lost.
If you are still working, regardless of your income, I challenge you to say you will be paying no new taxes if Bush tax cuts expire. Even if they don't expire, there's higher health care costs, cap and trade and some hidden new tax burdens on small businesses coming our way.
The Fed knows this now and knew it before. It's all in the presentation and this time everyone saw Bernanke stumble over reality. Hence the question, what planet are you from?
If ever there was a time to seek out a hedge against uncertainty it is now. With Fed actions leaning toward more quantitative easing, inflation and gold are sure to resume their walk hand in hand. Make no mistake, investors worldwide are continuing to buy gold and while the gold charts may have taken a brief respite, I believe the truth is about to set gold free to run toward some of its anticipated new highs.