‘Hoist by one’s own petard’ (blown up by one’s own bomb) is Murphy’s Law at work and the pundit’s worst enemy. Because, as soon as you put a prophecy out there, strange mechanisms go into play that make it very difficult for you to look anything but stupid. Yet there is a flock of people willing to, on a daily basis, put themselves out there with forecasts that, from experience, they know have a good chance of being wrong. To say the least, it is not easy being a pundit. Predicting, especially the economy or the stock market, is no mean feat!
One of the real ‘biggies’ that has confounded the majority of these fearless prognosticators, not only this year, but for the past five years is: contrary to their popular belief that it would not, the market has gone up. It’s gone up a lot. This was definitely not in the tarot cards.
For this, most blame the Fed for providing massive liquidity to the economy via three rounds of Quantitative Easing (QE) in what many refer to as a ‘zero interest rate policy’ (ZIRP). Through this, the Fed has expanded its balance sheet to over four trillion dollars. Problem is that the banking system is not using these reserves to expand lending…one reason for our less-than-robust economic recovery. It has, however, pushed investors toward stocks where returns are more attractive than bonds in a ZIRP environment.
So, let me see. The Fed has been on this well-telegraphed path for the past five years, keeping rates low to bolster a skittish, less-than-robust economy (post a financial panic), making stocks and other assets more attractive. They made nosecret about it. How is it so many of these folks didn’t urge us to buy stocks years ago? The answer is simple, seers and pundits look ahead. They surmised that QE would end badly. Why take the risk of a bad ending? They missed the point that QE might last for years while the investor waited for bad things to happen.
The unhappy ending (maybe for the pundits)
According to the pundits, QE would end with higher inflation, asset bubbles, skyrocketing interest rates and a tumbling stock market…no ifs, ands or buts about it. I mean, who in their right mind would buy stocks into this scenario? You probably wouldn’t, if you assumed this to be the right conclusion.
But, was it?
Evidently the punditry influenced many investors in that direction. Ergo, a lot of equity money remains on the sideline waiting for the ‘all clear’, willing to accept a sub-2.5% return for guaranteed safety. Strangely, the chorus of negative calls by the media and their cast of experts maybe working against the ‘bad ending’ by keeping people in their low-yielding, safe alternatives.
Another factor present, as we unwind QE, is foreign demand for our bonds. At 2.48 % our 10-year Treasury looks like a real deal compared to the German 10-year Bund at 1.36% or a Japanese 10-year at 0.57% (the Japanese know the meaning of ZIRP).
There are other factors working to keep rates low. One is the fact that Treasury issuance of new debt is way down because the size of our recent deficits have declined markedly. Also, because the market has been so strong it has caused pension funds with specific equity holding targets to sell stocks to get equity positions back into line with target-acceptable levels…the proceeds went into bonds.
You see what I’m getting at…that the ‘QE bad ending’ may be coming into question. Consider we broke below a 2.5 yield on the 10- year again last week (week ending 5/30/2014) with the S & P 500 closing the week at a new record high of 1923.57.
Exit question: Will Murphy’s Law continue to make punditry’s common wisdom a great contrary indicator?
What do you think?
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