Thursday, September 13, 2012

Bernanke Proved Us Wrong

The Fed announced QE3 earlier today.  Unfortunately, we had given the Fed too much credit when we assumed it would not announce nor implement a QE before the elections.  Our assumption was also based on the recent front running spike we had seen in the equity market.  Again, we were certainly wrong.  The S&P 500 is up 22 points, or 1.5%.  VIX is taking dump, down nearly 10%.  Gold futures is trading at $1766, up 1.9%; and WTI oil futures is up 1%. 
Before the FOMC press release, August PPI came in at 1.7%, 50bps above expectations.  Again, prices, input prices are rising.  Although the core PPI was in-line with expectations, today's QE3 announcement will likely make those volatile components of PPI, foods and energy, less volatile while they continue to increase, pushing up input costs even more.  This is not good news for the economy.  At some point, those higher costs will be passed on to consumers that are not seeing their wages increase.  This is also not good news for the economy.  Higher input costs may also slow down the very modest growth in jobs that we have seen the last few months.  Again, this is not good for the economy.  Simply put, contrary to how the Fed 'marketed' its latest move, QE3 will not help improve the job market. In addition, it does not address the lack of demand that we are seeing in this economy. 
The Fed also released its so-called economic projections, all of which was revised to show less optimism in 2012, followed by improvement in 2013, and baam, happiness and glory days coming back in 2014 and 2015.  Of course, the Fed's projection of inflation, based on PCE, was not changed much for this year or next.  However, for 2014 and 2015, the upper end of the inflation forecast range is above 2% (for both headline and core inflations).  So, all of this monetary easing better work before 2014 or else; at least that is what the Fed is implying. 
Yes, we have been wrong regarding the Fed's action, but we continue to ask - how does all of this monetary easing help "foster maximum employment and price stability"?  Yes, as Bernanke said, the weak job market does concern many Americans.  Whether his monetary easing will help create jobs is still a big question, even after four years! 
Bernanke keeps saying that the monetary policy will continue until the Fed sees signs of improvement, but he fails to tell us what those signs may be.  In addition, the Fed wants the MBS purchases to lower mortgage rates in order to, hopefully, attract more home buyers.  Mortgage rates have tumbled for the last few years but we haven't seen much improvement in housing.  In our opinion, a combination of jobs, higher income, and lower rates would increase demand within the housing market.  Unfortunately, the Fed's policy does nothing to address the first two - jobs and income. 
Speaking of jobs, last week's initial jobless claims of 382K were much higher than the 369K consensus.  BLS stated that 9K were due to the tropical storm, Isaac.  Even without that, seasonally adjusted initial claims would've come in at around 371K, above the consensus.  Of course, the prior week was revised higher. 
While the equity market keeps going up and we continue to realize that, for the time being, we made the wrong call on the QE matter, we remain pessimistic.  In our opinion, the current spike in the stock market has increased the probability of a correction further before the end of this year.  By the way, with all of this great news, the less risky sectors such as consumer staples are still up nicely compared to other sectors.  In fact, only two other sectors, materials and financials, are up more than the consumer staples.  This is pretty interesting.

No comments:

Post a Comment