The Bottomless Punchbowl
While we enter the season where we were about being over served or over indulging, the biggest message I got from Ben’s speech yesterday was that he is not worried about over serving us.
I have accepted that by and large inflation will not rise without real economic growth. I have accepted that treasuries are unlikely to sell off much so long as the Fed remains willing to add to their balance sheet. I even kind of understood after September’s QE Unlimited announcement, just how dedicated this Fed is to flooding the world with money, but after yesterday, I realized that I have probably underestimated that.
If you are worried about the punchbowl being taken away, don’t. Ben has every intention of keeping that punchbowl filled. Pour yourself another one. Heck, take the ladle a throw some punch on the floor, there is more where it came from.
There is little more Ben or the Fed can do on the downside. He basically admitted that, and we already knew that. It is why we can go down even with QE. He cannot control the “risk on” mentality, though he damn well tries. He wants to decrease “uncertainty” so that investors and business owners can be more aggressive. I knew all of that. What I didn’t really grasp is how willing he is to flood the system even once growth returns.
I somehow had visions that if unemployment rate ticked closer to 7.5% he would pull back. That if inflation got above 2.5% for a bit, he would pull back. What I took away from yesterday’s meeting is that he will continue to keep money easy far longer than I thought. Maybe it is 6.5% unemployment that is his real target. Maybe he will argue that inflation even at 3% is transitory. I have underestimated how bullish the bull case could be.
While he can’t help the downside much more than he already does, I think the upside could be bigger than I thought. He will keep rates low until 2015 almost no matter what the economy does. He will be aggressive long after even some doves have questioned whether enough has been done. He is determined to push the rock up the hill and is horrified that he won’t push far enough. He wants this rock pushed until it is over the top and rolling down the other side.
I for one would like to see less intervention, but it isn’t up to me to decide what we should get, it is up to me to determine what we are likely to get, and my takeaway from yesterday, was that he is more willing to continue policy than I realized. It isn’t a true “revelation” but is meaningful in my assessment of upside risk.
The other point that is clear, and has been for awhile, is he is focused on housing as much as possible because it is the one and only sector that he knows creates American jobs if it rebounds. It really is as simple as that. Americans still build American homes. Expect every bit of support for this sector that he can muster – but that we already knew.
The French Rating
I remain of the view that this downgrade may mark the turn of policy in Europe. I think it is positive in that France is now going to be fully on board with a Fed/BOE/BOJ style ECB. They won’t be able to change actual rules, laws, and treaties, but this downgrade has the potential to be what spurs the “core” to action, rather than more endless chatter on about next month’s bailout. It has been like sending your kid off to college, but only paying tuition one week at a time.
I want to highlight one thing about the downgrade which is how pathetically uncoordinated the rating agency was. The EFSF has over €150 billion of debt outstanding and Moody’s couldn’t be bothered to downgrade it at the same time? They have been pretty clear about how the EFSF gets its rating, so the downgrade is almost a certainty, yet here it is, still Aaa. Pathetic.
It is sad but we are learning that people don’t care if there is no oil at stake. I don’t know what will happen to the situation there. It is obviously sad that there is death and the situation is difficult because of the mix of politics and religion on top of the violence. But in the end, for the markets, it doesn’t seem to matter that much. There was a time when the market would have reacted dramatically to each and every headline. Now there is more chatter about who owns the “iron dome” than what will happen to the global markets if violence escalates.
The markets have made it through the Arab spring so far. Egypt and Libya caused some fear for the markets but both resolved themselves to the satisfaction of the markets. The markets just don’t care that much about a country without oil. Individuals may care a lot. Groups of people may care a lot, but the sad reality is that without oil, and so long as this doesn’t start affecting oil producing states, the markets will largely ignore it.
I Remain Bullish
I continue to be bullish and yesterday, for first time in awhile, have turned from neutral to bullish on Spain. So I’m about as bullish as I’ve been.
Have safe travels and a Happy Thanksgiving.