Stocks, Words, Facts
Razvan Podariu | Oct 20, 2014 05:40AM ET
If you would be asked to describe the market in one single word, what would that word be? My word is RODEO. In the past few days, many traders, hedge funds and investors were caught on the wrong foot by the market. In other words, they were the riders trying to stay atop the bucking bull for the most dangerous 4 weeks in this "sport". In these 4 weeks, the Dow Jones Index plummeted for more than 1400 points and briefly tumbled below the 16 000 level before rebounding dramatically. No one was saved: S&P 500, Nasdaq, DAX, Euro Stoxx, Nikkei - the world's most important stock indexes, all closing in red every single week since September 15.
In these 4 weeks, the retail riders were the first to drop from their bulls. They did not managed to have their "8 seconds" of glory. I have received many emails in the past few days that are describing very well the retail traders "state of the soul," like for example this one: "I am in total loss in the last weeks. So it would be great to get a hand to come out of this hole." Unfortunately I can't do anything to help them, but St. Louis Federal Reserve Bank President James Bullard, tried to.
In his intervention on Bloomberg, he said "the Federal Reserve should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations." And then the "dramatic rebound" happened. I think no words can describe better what a "dramatic rebound" means, than the following chart.
In my opinion, the market over reacted to Bullard's comments but somehow the market's reaction is justified by how the media "transposed" Bullard's words. You need to watch the video and follow his words and you will notice that he also said "if it's just me in the committee - I am just one person - that's one of the things I would think about in the upcoming October meeting"
I am not sure if the market priced that James Bullard not only that he will not be the only member in October committee but even if he is going to be there, he doesn't vote in the policy this year. Or maybe the new normal is to price more the "words" than the "facts". Before coming with this crazy idea of "taper delay" the same St. Louis FED President said that "there are bullish factors coming out of this market sell off"[for the US economy] and that "the US macroeconomic fundamentals remain strong and the US macroeconomic forecast remain intact." And by macroeconomic forecast remaining intact means the strong labour market and the 3% GDP growth for the second half of the year. The only "problem" is the inflation for the equation to be completed. Also his "crazy idea" is to delay the taper till December not to cancel it so I really don't see how 3 more months of $15 billion QE will save the inflation if $85 billion/month did not brought the 2% target in more than 2 years.
The stock market sell off is not driven by lack of inflation but rather by weak global growth. Japan is not going anywhere, China is expected to deliver a 7.2% GDP growth YoY - a drop from 7.5% and key indicators of the German economy suggest that it could now enter a technical recession, as data show the euro area's factories are producing far less than analysts anticipated. If the European growth engine is in trouble, it's useless to ask how Greece is doing, or Italy or Spain.
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FED does not need the $15 billion QE a month to keep the "easing door" opened. The market is already doing the job for the FED. Have a look at the US Treasury yields: 10 years at 2.15% and we had it at 1.98% in the past days, 30 years at 2.93% and the 2Y at 0.33%. All three UST yields with a strong bearish bias so do not exclude new lows. That's EASING. And do you know what else is free of costs EASING? The world economy is enjoying the equivalent of a huge quantitative easing programme because of the oil prices drop. The decline in prices would generate about $660 billion annualised. Tracking this into gasoline prices, in the US, the windfall would amount to a tax rebate of just under $600 per household.
I reiterate the fact that in my opinion the market over reacted today at Bullard's comments but I am not sure if this frenzy will last till October 29 FED's meeting. In my opinion it will not, it can't. But very often the market's irrationality beats the logic and the RODEO starts again. One thing is for sure: the market buy bonds because they need a safe haven and they also buy gold for the same reason. I don't think this is only a short term secondary trend in the gold market but more likely the beginning of a new trend and this time you will also have to tightly fasten one hand to the bull with a long braided rope and stay atop of the bull for "8 seconds" of glory.
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