Session 90-In StockMarket Land, the difference between apples and oranges is often hard to discern

“Markets flooded with cash, should Fed prep to stamp out risk(Reuters via CNBC 2/21/2014)?”  First of all, this is a stupid question as their mandate deals with unemployment and inflation.  They are only the ‘risk police’ when it comes to risk of inflation. They can warn about “irrational exuberance”, but it is not their job to stop it, unless it is the indirect result of steps taken by the Fed to cool inflation (i.e. raising rates).  As inflation is rather muted and unemployment still a concern, Fed tightening does not seem very likely at this point.

Back to apples, oranges and other false equivalents…

The “Market flooded…” article tries to compare fed policies in the run-up to the ’08/’09 market collapse to their policies post-crash, and concludes we may be headed for a similar outcome.  The policies were easy money and low rates.  The outcome, according to the Reuters story, was the subprime mortgage debacle.  They forgot to mention Congressionally-mandated lower lending standards and Wall Street’s creation and proliferation of derivatives (“financial weapons of mass destruction”) used to package, insure and market them.  Oh yes, there were the banking and SEC regulators that were asleep at the switch.  Also, we must not forget the profound effect of the removal of Glass, Steagall restrictions on banks being in the securities business. These restrictions that had been in place since the Great Depression.

I think that this piece, lacking perspective (not untypical of most financial reporting), really failed to present an accurate picture of why the Fed kept rates low for so long in the first half of the decade.  The market and the economy were stunned by the ferocity of the bursting of the ‘Tech Bubble’ in 2000.  Ergo a more relaxed Fed policy was called for.  Then we were confronted by the 9/11 terror attacks. These really spooked the market and the economy.  Finally, we entered into two wars.  During the next few years the economy was limping along while oil and gasoline prices spiked to new all-time highs, acting as a counter to the loose monetary policy.  Many worried that the U.S. was becoming the next Japan (economic stagnation) with China ascendant.  Comparing now to then is comparing apples to oranges.

A follow-up on Session 89–From silly to really ridiculous.

We featured a story in our last post (Session 89–Waiting For The Other Shoe To Drop) about a chart of the current Dow Jones Industrials, which eerily resembled the Dow in September of 1929.  This chart and considerable media commentary about it had raised significant fear and concern in certain circles (you know, “deja vu all over again”).  Well, not to worry, one of the eminent technicians focusing on the chart, Tom McClellan (McClellan Market Report–Chart) sounded the ‘all clear’.  Says McClellan in a column written February 11 (Ironically the same day Mark Hulbert posted a story indicating the chart correlation was drawing eerily more similar), the market had to stop going higher if the comparison were “to keep working.  Continuing higher from here would be a break from that pattern, and would constitute evidence that the analog was breaking correlation.”  Of course, the market did go up… spell broken. No matter, lots of people became overwrought about this as demonstrated in Jeff Saut’s comments in last week’s Barron’s(Dow-pocalypse Now).

Now, I don’t totally dismiss the usefulness of charts.  They are one tool, which coupled with fundamental analysis, can be helpful; but, from my perspective, they should not be used in a vacuum.

What do you think?

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