Thursday, September 22, 2011

Did Bernie Disappoint?

We are amazed that it took the Fed so long to realize that the economic and financial issues we are facing are not mere temporary shocks.  And it was such realization by the Fed and its inclusion in the official statement yesterday that sent the markets down.  Based on where the futures are right now, the equity markets will likely be down today also. 

The Fed said “recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” and it sees "significant downside risks to the economic outlook, including strains in global financial markets."  The Fed has realized that the psychological approach to turning around the economy will no longer work.  Consumers will likely not jump up and consume as soon as they see the equity market bounce back up; and companies won't hire.  While the Fed claims that helping the state of employment and controlling inflation are its two main objectives, it has obviously ignored the first one.  And we think its announcement yesterday was an indication that it saw the risk of losing control of the second objective in the short-term increase significantly.

Simply put, the Fed's policy goal is to make long-term borrowing more attractive for businesses and consumers by buying $400bil worth of long-term US debt until June '12.  This may bring down long-term borrowing costs which the Fed believes will help drive more borrowing by businesses and consumers; hopefully based on long-term objectives such as increasing capex and adding human capital (possibly), and purchasing homes.  The impact of this type of money printing won't be felt in the economy until sometime. 

So, without a 'quickie' in store for the equity market (unlike old times), gold retreated further and it appears it might continue to do so today.  The same support levels that we touched on a while back remain for GLD.  If it gets below 170 (or around $1,760 for gold), then it can soon test low 160's (or $1,650), assuming the Fed won't make 'politically correct' statements in the near future.  In addition, the gold volatility index (GVZ) has remained at historically high levels.  The Fed's move has made the dollar the least worse, which also won't help gold; and we note that it was not expected as the market wanted to see more of an outright short-term money printing and dollar-devaluing policy.  With regards to the S&P500, if it goes below 1,150, which appears to be likely, then YTD lows of around 1,120 could be re-tested.  We've seen so much volatility, that the market appears to be 'consistently' volatile.

Lastly, to make things worse, initial weekly claims came in above expectations, 423K vs 418K.  In addition, the previous week's figures were upped by 4K.  Continuing claims declined, but we note that many other factors may have driven this, including many unemployed running out of their unemployment benefits (regular, extended and emergency).

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