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September 21, 2013

Super Ben Bernanke

This week, financial markets feverishly awaited Chairman Bernanke’s action regarding cutting back daily money creation. While the expected “taper” from $4,250,000,000 per business day to $3,700,000,000 would be cosmetic more than anything, the Fed decided not to taper at all leaving monetary policy as if the economy were in the depths of depression. In response, all asset classes took off simultaneously as more future money supply lowers the value of the $ that is being created. However, the reaction was short-lived and by Friday all gains in the stock market had been reversed. What is going on?

The Economy

When it comes to economic conditions numbers don’t lie. While QE has been very beneficial to those entities receiving mountains of money at zero interest, the middle class in America has not seen the benefit of that monetary policy.  As 70% of the US economy depends on consumer spending, a shrinking middle class points to lower future profits.  Take a look at this chart depicting US household income over the past 40 years:

household-income-money-illusion

As you can see while incomes are rising, the true increase in wages is rather low. Zooming in for the last decade, the picture becomes more striking:

Dshort-1-25-13-household-income-monthly-median-since-2000

Furthermore, CNS news reported this week that  23,116,928
to 20,618,000: Households on Food Stamps Now Outnumber All Households in
Northeast U.S. 

Clearly, QE cannot and will not be able to address structural problems in the (US) economy but it does buy time. How much time?

Asset markets

As I had written in Running with the Bulls , the trend is a trader’s friend and it is up(stocks) for as long as three conditions are met. First, the Fed must not end its enormous money creation. Second, the bond market must not rebel and force interest rates shockingly higher too fast. Third, the currency markets must not lose confidence in the QE programs that are being implemented globally. Every trend eventually comes to an end and this particular one will be rather shocking once it reverses. When it comes to the stock market as an investment, it is well worth watching what the Oracle of Omaha, Warren Buffett does. Recently, he has been selling equities and raising cash. In a recent interview Mr. Buffett opined that “Stocks have moved a long way. They were very cheap five years ago. That’s been corrected…We’re having a hard time finding things to buy.”   Has Warren Buffett Nailed Another Market Top?  Caveat Emptor.

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