The Fed Is Overdoing It: The Misallocation of Capital Is Now Too Great And It Has Gone On Too Long, Bad News Soon May Just Become…Bad News
Gross: Fed’s Overdoing It
Bill Gross, PIMCO, says the Fed’s policies are part of the problem and not the solution. He says rates are so low you reduce the incentive among investors to take risk.
Bill Gross – Hey Fed, your stimulus isn’t working
“Well it’s been five years Mr. Chairman…Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution.”
What the Fed does, then, will be equally important as to why.
If the Fed can convince the market that it is withdrawing QE money creation because the economy is stable, the market would be more likely to absorb the hit with minimal disruptions.
But if the reason for exiting is that the Fed is worried about the side effects that Gross and others have warned about, that would be more disruptive.
“If the Fed continues to make noises about the tapering and the reason is they are worried about risk, as opposed to them tapering because of a stronger economic foundation, that is worrisome for the market,” said Quincy Krosby, chief market strategist at Prudential Annuities.
Some FOMC members, Krosby said, “are worried about risk building built up in the underpinnings of the market, that QE is causing risk in the search for yield.”
Despite the continued run-up in stock prices, other indicators are showing that while economic growth continues, expectations are getting unhinged from reality.
Bespoke Investment Group uses a proprietary model that compares economic reports against estimates, and it is near a 15-year low in terms of positive surprises.
If that trend continues, bad news is likely to become nothing more than bad news.
Federal Reserve Policy “Made in Japan” – Gary North
They made another mistake, he said: too much talk about the exit. “Also, we could have done better in communicating our intentions and goals. We put too much emphasis, too early, on the exit. At an earlier stage, we should have put greater emphasis on our commitment to use all our tools to the fullest extent possible for as long as needed to achieve our dual mandate objectives.”
He is right, but for the wrong reason: There is no exit strategy. There never has been. The FOMC placed the economy on the back of the tiger. It cannot stop inflating without causing a depression. The misallocation of capital is now too great. It has gone on too long.
BYRON WIEN: It’s ‘Unrealistic’ For Stocks To Keep Rallying Like This Without A Correction
We’re seeing market fissures.
RICHARD KOO: Japanese Stocks Crashed Because The Japanese Knew Something That Foreign Investors Didn’t
Too many hedge funds just closing their short-euro trades and moving on to the yen.
Stifel Nicolaus Head of ETF Trading and Strategy Dave Lutz flags three reasons stocks may be selling off today:
- More bad news out of Japan. Lutz points out that Nikkei futures are down about 1% right now from today’s close, and highlights the following from a Japanese press report: “Speculation is growing that the Bank of Japan will soon be left with no room to buy real estate investment trusts, a practice the central bank started in December 2010 as part of monetary easing measures.”
- Technical levels. Lutz notes that the Russell 2000 index fell below its 20-day moving average, “setting off quant programs to sell stock and buy hedging.”
- Credit default swaps. “There is some focus going around on [investment grade] CDS – CDX IG went from 76.81 to 83.75 today – a huge move,” says Lutz. “JeffCo has a note out highlighting the LACK of protection for sale.”
After all, the stock market is still in the midst of its historic rally. Real estate prices have finally leveled off, and for the first time in five years are actually rising in many locations. And the unemployment rate seems to have stabilized.
It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%.
Richard Russell – Silver, Gold & A Coming Stock Market Crash
Personally, I’ve voted against the Bernanke way. The reason is that I never thought it was possible to halt and then reverse the primary trend of the stock market or the economy — any more than I think we can halt the dawn and thus hold back the night.
One of the basic theorems of Dow Theory is that the primary trend of the market cannot be reversed. Once a bull or bear market is under way, one way or another, it will run its course to conclusion. The primary trend of the market and the economy is based on human sentiment — greed and fear, bear markets and bull markets end in exhaustion. Bear markets end when the last sellers have exhausted their desire to sell. Bull markets end when the last group of buyers have had enough.
Marc Faber: “If someone put a gun on my head and said ‘you have to be long or short,’ I would take the short side.”
“That could bring a new high of 1,700 on the S&P. I wouldn’t bet on it,” he said. “If someone put a gun on my head and said ‘you have to be long or short,’ I would take the short side.”