highs for the Dow Industrials and the S&P 500, topping the highs
of August 2. Surprise, surprise, surprise.
was not guaranteed the Fed would start to taper, but it was widely
expected. We've talked about the reasons why the Fed might taper; the
timing of the remaining FOMC meetings this year, some improvement in
the economy, fear of frothy markets. Fouhgetaboutit. After two days
of meetings, the FOMC decided to continue with the current
quantitative easing policy of purchasing $85 billion a month in
mortgage backed securities and treasuries.
punchbowl is full and the party is still rocking. In addition to
record highs for the Dow and S&P 500, we saw 5-year Treasury's
biggest yield drop since March 2009, the US dollar's third worst day
in a year, home-builders had their biggest rally since last summer,
and gold had its best day since January 2009.
least Wall Street institutions and traders love the accommodative
policy and the morphine drip of free money from the Fed. So the
patient is still on morphine and the reason is because of extreme
weakness. The economy just isn't strong enough to survive on its own.
stock market no longer rallies to the tune of increased retail sales,
growing export markets or improved employment expectations, better
durable goods orders and such. Good economic news is bad news for the
markets because the Wall Street crowd and any investors still playing
equities understand full well that any sign of fiscal improvement
might mean the end of the private Federal Reserve’s morphine drip.
And without the Fed’s artificial stimulus, the financial markets
curls up and dies, but of course they'll wipe out your 401k when they
go. Wall Street can rally on news the Fed is continuing QE, but the
broader economy was never invited to the party.
the third time this year the central bank cut its forecast
for US economic growth in 2013. The Fed now sees the economy
growing in a range of 2.0% to 2.3%. Earlier forecasts had predicted
growth of 2.3% to 2.6% and 2.3% to 2.8%. Being wrong is nothing new
for the Fed. The bank has repeatedly offered forecasts over the past
few years that turned out to be way too rosy.
other observations noted in the FOMC statement today: the
unemployment rate remains elevated, mortgage rates have risen,
fiscal policy is restraining economic growth, inflation is less than
expected, and the economy just hasn't picked up steam.
they didn't specifically talk about was the frothy markets. The Fed
plan has been to prop up the banks and the financial markets,
creating a wealth effect on Wall Street, and then let the wealth
trickle down to Main Street. They've done a nice job of creating a
wealth effect on Wall Street, but there hasn't been any trickle down;
there won't be any trickle down, and once again the Fed is looking
like they've painted themselves into a corner with no exit.
postponing the decision to October or even December or whenever, the
FOMC may be setting the market up for an even larger correction when
it finally bites the bullet. Every
time the Fed has phased out one of its stimulus programs over the
last few years, stocks have dropped; first in early 2010, with the
winding down of QE1; then in spring 2011, when QE2 ended, and finally
in 2012 with the end of Operation Twist. In fact, stocks rallied
again only when the Fed announced or started a new round of stimulus.
there are other considerations: The German election will come this
weekend; the Syrian situation looks to be moving toward a solution
that doesn't include military intervention although it is still full
we face those fiscal policy concerns; what could be some bruising
budget battles as hard-line House Republicans vow to either shut down
the government or not extend the debt ceiling unless Obamacare is
defunded. It won't be defunded, and even the Wall Street Journal is
calling the shutdown idea kamikaze missions.
and Republicans are far apart on spending issues. More important,
perhaps, Republicans continue to insist they won’t continue funding
government operations—or, when the time comes, increase the
Treasury Department’s borrowing authority—until Democrats agree
to defund or delay Obamacare. That’s simply not going to happen.
No, this isn’t the first fiscal policy standoff of the Obama
presidency. In the past, Democrats and Republicans always reached
some last-minute agreement. This time each side has a lot less
incentive to compromise. And there are apparently no
backroom negotiations; there are no calls to dine with the
opposition; there is no discussion going on at all at this point.
makes this time is different is that, in addition to having carved
out hardline positions, neither side has an incentive to back down.
In 2011, Obama was willing to give on his demand that revenue
increases accompany spending cuts because he understood the
apocalyptic consequences of failing to raise the debt ceiling. In
late 2012, Republicans knew that the alternative to a small tax
increase was for taxes to rise automatically by a much larger amount.
The sequester, although unsatisfactory to both sides, was a built-in
default position; and indeed that's what happened. This time, on the
other hand, every party to the negotiation has reason to welcome the
government shutdown that would result if they can’t reach a deal.
with the White House, which has been annoyingly open to concessions
even when it has all the leverage. Now they are finding no
constituency for caving. Add in that the elections have passed and
lame ducks find it easier to grow a spine when they don't have to beg
for campaign contributions. You can’t rule out the possibility that
the White House will blink when the deadline gets close. At the very
least, one can imagine Obama signing a short-term government funding
measure (known as a continuing resolution) that leaves the automatic
sequester cuts in place so long as it doesn’t touch Obamacare. Even
if he were inclined to do this, Congressional Democrats seem less
willing to support him than in the past. They believe they can demand
much more in exchange for saving the GOP from a shutdown.
the Tea Partiers, a shutdown
would mean they forced their leadership to stand up to Obama, which
plays well in their districts and the various organs of the
conservative movement. And when the GOP inevitably bowed to public
opinion and sued for peace, the Tea Partiers would be able to accuse
their weak-kneed leadership of caving, thereby enhancing their status
within the party, and greatly enhancing contributions.
you've got the old line GOP as represented by Speaker Boehner and
McConnell from the Senate; they can't control the Tea Partiers, and
it appears they will accept a government shutdown because they can't
stop it. A shutdown would slow the economy and wreak havoc on people
who rely on government services, and wreak havoc on companies that
service the government and the people who receive government
services, and there will be a massive fallout.
consequences are nothing alongside the fallout from defaulting on our
debt, which will happen if we don’t raise the debt ceiling by
mid-October.So a government shutdown gives everyone a chance to sober
up before we take on the substantially higher-stakes proposition of
avoiding a debt default.