Weekly Update: QE to infinity and beyond
The concept of don’t fight the Fed is in full force today after yesterday’s bold shift in policy. Instead of dribbling out more QE in spurts, the Fed in effect said QE will remain in place as long as it deems necessary. Chairman Bernanke has a fear—not just about his job (candidate Romney has said he won’t renew Bernanke’s term), but also about deflation. In my travels, I have been talking about economic growth slowing and the possibility of a recession next year. But here’s Bernanke saying he’s going to keep monetary policy very loose until the unemployment situation gets MUCH BETTER, that he’s going to be extremely easy with money under WELL AFTER we see the recovery improve, that he’s going to stick with the zero-percent interest-rate policy AT LEAST until mid 2015. In other words, he’s going to keep printing and printing and printing money. More than three-quarters of all the Treasuries that Secretary Geithner printed last year were bought by the Fed. We are buying from ourselves. Who’s kidding whom? It’s the most sugar-high possible thing you can do. IT’S UNCHARTED TERRITORY, a much more expansive QE than the equity market had expected. And so stocks surged and, at this writing, were rallying again today.
The macroeconomic impact of open-ended QE is still likely to be limited, but from an equity investor’s perspective, it is probably the most equity-friendly form of additional easing that the Fed could realistically have implemented. ISI Global notes that there’s been a pullback in bearishness. There is less “put” buying now than at the 2011 or late March/early April 2012 tops. Hmm. There’s a dichotomy between what we see—the slowing economic fundamentals (more below)—and what’s going on in the equity market. Unlike QE1 and QE2, the Fed’s acting even though the markets are near record-highs. The cumulative advance/decline line is at an all-time high; daily new highs are averaging 155 per day (100 is required to define a bullish trend); and yesterday’s trading revealed strong volume in advancing stocks. These all confirm the current move and the breakout above resistance at 1,450 on the S&P 500, which we blasted through yesterday. Dudack Research says there is little resistance now before 1,550-1,565 (the S&P’s all-time high). Are we really going to go to brand-new highs? Based on what? The Fed? (Not supposed to fight the Fed, remember!)
Ask yourself this, America. Are employers going to be hiring and spending more based on more QE (industrial production unexpectedly fell in August, more below)? Are consumers going to be buying more based on this (core August retail sales slipped in August, more below)? Are consumers going to borrow more? (Despite record-low interest and financing rates, consumer credit contracted in July, led by the second straight monthly decline in revolving credit, which includes credit cards). I keep thinking about my personal portfolio and gold. Gold is in the process of reestablishing its uptrend, with this week’s moves by the Fed and the attacks on U.S. embassies in the Middle East (more below) driving prices up further. I have been saying in this election year, we may reach a peak in stocks in the third quarter (which ends in a few weeks). So we’ll see. A rally that was already very strong and impressive had further fuel thrown on it—lots of it—this week, spurring performance-anxiety/chase-related buying. The pain trade remains very much to the upside. JP Morgan calls this “the angry rally.” But how much further can it go unless the retail investor gets involved. Meanwhile, my conversations today with wealthy and not-so-wealthy have, interestingly, centered on the question of how much is enough gold to own.
Job outlook improves The percentage of small businesses planning to hire more rose to 10% in August, the NFIB said, the highest level since February 2008 and up dramatically from a March low of 0%. This could be significant given that small businesses historically have accounted for the bulk of new hiring. But it will be interesting to see if the hiring intentions hold given that about 2 1/2 times as many firms participate in the survey in the quarter’s final month. Surveys from Manpower, the Conference Board and the Society for Human Resource Management also reflected steady hiring intentions, though at levels unlikely to improve the unemployment rate much.
Inflation better than the headlines The August CPI jumped after two consecutive months of flat readings as energy prices experienced their biggest month-over-month gains since June 2009. However, the core increase rose less than expected, bringing the year-over-year increase in core CPI to 1.92%, the lowest in a year. Producer prices followed a similar pattern, albeit at slightly higher levels, suggesting inflation pressures remain contained and providing room for the Fed to justify its record easing.
Consumer mood improves—do you think they’ll go shopping? The University of Michigan’s initial take on September consumer sentiment surpassed expectations with its second-highest reading on the year on improving expectations and a moderating inflation outlook. The RBC Consumer Outlook Index also jumped this month by the most in eight months to the highest level since December 2007, when the last recession started. Separately, the Consumer Comfort Index advanced the most this year.
August industrial production disappoints It declined on broad-based weakness, and July also was revised downward, pushing capacity utilization to its lowest level in nine months. The decline in motor vehicle output and production of computer and electronic components was of particular concern, suggesting a big drop-off in third-quarter external demand. A separate report showed business inventories unexpectedly rose in July, but the buildup appears to be driven more by softer-than-hoped demand on the part of firms rather than a ramp up of production in anticipation of strengthening demand. Combined, the reports raise the risk to second-half GDP.
Retail sales worse than the headline August sales rose slightly above consensus, but the increase was heavily concentrated in vehicles, building materials and gasoline. The core component of sales slipped 0.1%, disappointing expectations. Also, the July core figure was revised downward. This raises the risk to second-half GDP.
Exports lose their punch July’s trade deficit widened less than expected, with exports falling 1% on the slowing global-growth backdrop. While the report suggests trade won’t hurt third-quarter GDP (it’s been a drag in prior quarters), the sharp deceleration in exports is worrisome. It indicates that exports no longer will be a major engine of growth as they have been to this point in the cycle. The near- to intermediate-term economic outlook will therefore depend on an orderly transition to domestic drivers of growth, such as consumer spending, business investment and housing. Do we feel lucky?
Canary in a coal mine? On the 11th anniversary of 9/11, Egyptian protestors breached the walls of the U.S. Embassy, pulling down and burning an American flag to protest a film produced in the U.S. they said was insulting to Islam. Later that day, the U.S. Embassy in Bengahzi, Libya, was attacked, killing its ambassador and three embassy staff. On the same day, Israeli Prime Minister Netanyahu leveled the sharpest attacks in years by an Israeli leader against Washington amid differences on how to address Iran’s nuclear program. Has me thinking about gold again.
Like Scarlett, we’ll think about that tomorrow Nearly half of all Americans lived in households that received federal assistance in 2010, and the Heritage Foundation finds more than 70% of federal spending goes to dependence programs, up dramatically from only 28% in 1962. Concerning Social Security, Medicare and Medicaid, Heritage says, “No event will financially challenge these important programs over the next two decades more than this shift into retirement of the largest generation in American history.” It’s the elephant in the room.
Election watch A Gallup poll found 64% of Hispanics said they are certain to vote this year, compared to 77% in 2008. The drop among young voters is even larger. The big wild card is the Hispanic vote, which will be especially important in states like Florida and Colorado. Meanwhile, 84% of seniors said they are certain to vote.