Few sitcom scenes match the classic of Barney (Barn) Fife (Don Knotts) frantically fumbling to pull the single bullet from his shirt pocket, loading it into his revolver, and promptly shooting himself in the foot with it. The news is out. It’s helicopter time. The problem for old Bern is, he just shot his last bullet. There’ll be no more speculation regarding further QE. He’s effectively said QE will continue forever—at least as far as he and his lunatic FOMC colleagues are concerned. But let’s back up a bit and put the week in context.
Stocks in Asia followed through Monday with gains of about 0.5%, matching the action Friday in the U.S. European stocks drifted down 0.3%, awaiting further word on central bank actions. In a sure sign of market bloat, IBM broke back above $200 per share. U.S. stocks dropped 0.5% for no particular reason.
Tuesday (9/11), stocks in Asia closed slightly down. In Europe and the U.S. they rose 0.3% and 0.6% respectively, perhaps anticipating a favorable ruling from the German Federal Constitutional Court Wednesday. Further confirming the risk-on mania, Facebook rose over 3% to make a run at $20 again. The previous Friday, the dollar index slid about a point, breaking below its 200-day moving average to close at 80.25. Tuesday, it continued its slide, closing below 80.
Wednesday, stocks in Asia moved broadly higher, gaining over 1%. The German Federal Constitutional Court ruled in favor of German participation in the ECB rescue efforts. Stocks in Europe closed just slightly higher. In the U.S. they did a bit better, rising 0.25% on low volume. Facebook rose nearly 8%, breaking above $20 per share to nearly 21 after words from its highly qualified CEO.
Thursday was the big day. What would the Fed do? Stocks in Asia and Europe stayed paralyzed and closed about flat. Stocks in the U.S. reacted euphorically to the truly reckless FOMC decision to pull out all stops and inflate to infinity, rising 1.7% on surprisingly low volume considering the tenor of the announcement made. The VXO plummeted again, falling 11% to move below 14. Confidence in the dollar continued to erode as the dollar index closed at 79.26.
The FOMC said they’ll buy $40 billion per month in MBSs until the cows come home (economy and unemployment improve). Since that policy has to date proven ineffective on those counts, that says to me that they’re embarking on a reckless late-cycle Keynesian fantasy of desperation. What’s the true cause of this desperate move? Is a big bank in trouble? Is the derivative pool ready to implode? I agree with Jim Rogers that based on the stated reasoning this was a foolish move by the FOMC.
Here’s an interesting quote from Bernanke’s news conference following the FOMC meeting:
We can make a meaningful and significant contribution to reducing this problem, we can’t solve it, we don’t have tools strong enough to solve the unemployment problem. (14 min)
Bernanke issued comments including the need to increase 401K balance and home values to make the public “more willing to spend.” The FOMC action targets the depressed housing market in particular with the MBS purchase focus. He also said that the Fed “does not have the tools” to offset the effects of the “fiscal cliff.” And from the alternate reality dimension, he also mentioned the Fed is building a “reserve of credibility.”
This action by the FOMC was something I thought would not be allowed to happen before the election. I was obviously wrong. As I’ve mentioned many times, only God can predict the future, and I’m not God. This call demonstrates that. It’s still important to try to make these calls as they have a big effect on investment decisions. I’ll stick with the call for a significant market decline to assure a Romney election, but now stocks will have to fall from a higher level and as time runs down to election day, at a faster pace.
Friday, the stock buying frenzy spread to Asia, launching price gains there of over 2.5%. Stocks in Europe played catch-up as well Friday, rising over 1% as their markets had closed just before Thursday’s QE3 announcement. The dollar index continued its decline, dropping below 79 while the 10-Year U.S. Treasury Bond yield shot up over 6% to 1.87. U.S. stocks added another 0.6% to their gains on moderate volume while Facebook rose over 6% to close at $22. Finally, APPL stock made another all-time high as it launched its iPhone 5.
For the week, S&P 500 Index rose 2%, gold 8%, banks 5%, 10-Year U.S Treasury Bond yield 11%, IBM 3.6%, and Facebook 16%, while the U.S. Dollar Index declined nearly 2%.