It is Tuesday, June 4, 2013. As the markets rolls to its 4:00 PM EDT close, I see a bevy of bad news articles penned by Jeff Cox (a.k.a. “The Bad News Bearer”), senior writer for CNBC. I have rarely heard (in his on-air appearances) or seen in print a positive word emanate from Mr. Cox. So, two of these had a negative slant with the third a bit more positive (an erstwhile bear turning positive–usually a very negative happening). None of this is really useful to the individual trying to invest for the long-term; and, as is typical of the work of the financial media, maybe unintentionally, they tend to undermine investor psychology.
So, the market is probably due for a correction, a normal event. The media never presents it that way. It is always “of the moment” bleak, an impending disaster. By the time the market does take a header people are really worked up and, as a result, may not make for the best decisions. This is where kortsessions tries to be as a source of useful perspective.
To that end I have talked about the end of QE (quantitative easing) being an event that would create a lot of angst in the market and handwringing among investors, big and small (Session 35 & 35b). This appears to be the case, even though QE is alive and well. Just talking about when and how it will end and reverse has the market very jittery. There has been no real action to do so.
Let’s take a look at the articles.
Article number one is titled “Why Bad News Soon May Just Become….Bad News.” The article deals with the phenomenon that bad economic news, when it is announced, is often perceived by the market as good news…the Fed will continue QE, lest it throw the economy back into the dumper. Cox cites as a particular to his negativity, “bad economic data, such as this week’s Institute For Supply Management negative readings, coming in conjunction with calls for the Fed to ease its foot off the gas.” The article goes on to complain about the quality of earnings growth we have seen (more cost cutting than revenue growth) and the tepid pace of economic recovery.
What Cox and many others continue to miss is that the Fed is only four of the spark plugs on the V8 that is the U.S. economy. Fiscal policy represents the rest and fiscal policy in this country is in a shambles. It would seem, at this point, Congress is doing all in its power to retard the economy. Importantly, the patient (our economy) has recovered from a nearly fatal heart attack. Considering the current fiscal uncertainties the patient is reluctant to strain its newly rehabilitated heart. Ergo, new capital investment is sluggish and growth tepid. It may be hard to grow as rapidly without public sector support. Also, the constant negative tack from the financial media and elements of the political media acts as a reinforcement to this lack of confidence. Having laid out the obstacles faced by the economy, under the circumstances, 2.5% GDP growth looks like a ‘glass half full’ to me and GE with a 3%+ yield looks like a better deal than a 2%+ yield on a ten-year treasury.
Interestingly, one of the sources quoted in the above article was none other than Mohamed El Erian of PIMCO fame (his article–“Walk, Don’t Run From Equity Risk”). He was urging the Fed pull back on QE. In a second article by Cox, “Gross Skewers Bernanke: You’re Part of The Problem,” you get a detailed account on PIMCO founder, Bill Gross (AKA the “Bond King”) and his bashing of Mr. Bernanke and current Fed policy.
Now, I am not sure that Gross and El Erian are the best sources of unbiased opinion on Fed policy. Until very recent years it was Fed policy driving rates down that made these guys very rich during what has been a 30-year bull market in bonds. Bonds being PIMCO’s main expertise, the firm had a tremendous tailwind with which to grow their business (now $2 trillion plus in assets). With the bond market potentially turning over and the Siren song of equities blaring in investor’s ears, this has to be a tough environment for PIMCO.
El Erian, in his interview said, “economic growth is not coming fast enough to justify the artificially high asset prices caused by the massive bond-buying program.” Remember that “massive” refers to the Fed purchasing about $4 billion dollars a day in government and mortgage-backed securities. This is being done in a U.S. government bond market alone where over $500 billion trades daily. The $4 billion is less than 1% of daily government volume, hardly “massive.”
Yes, $85 billion per month is a big number and it adds up quickly, but you have to put it into perspective. The unwind of these purchases, if done at the same pace, will be more of psychological negative than a supply event that the market will not be able to handle. I refer you back to session 35 & 35b.
The third (and maybe most disconcerting) “Bad News Bear” story by Jeff Cox, covers an interview with a former perma-bear, Nouriel Roubini–”’Dr. Boom,’ Roubini Sees Two Years of Stock Gains.” Roubini is one of our “One Shot Wonders” (kortsession 13). I published number 13 on March 8, 2013. In it Professor Roubini offered his opinion on the dire economic effects of raising taxes on wealthy Americans. Check out his quote in paragraph 2. Of all these anecdotes this one worries me the most–a perma-bear changing his position. Maybe this correction is going to be “THE BIG ONE.”
What do you think?
P.S. Cox published a real humdinger Wednesday, “Companies Spending Cash On Investors, Not Workers.” This is one of the most ridiculous pieces I’ve seen lately. Cox asserts that companies should not be rewarding shareholders by using excess cash to buy back shares, but rather, they should be using that money to hire additional workers (maybe to produce goods and services that there may be no demand for?). The author calculates that that the $290 billion spent on buybacks this year, if it were diverted to hiring, could support an an additional 5.7 million jobs (@ $60,000 annually per job). Unbelievable!
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