Check out my review of Bill Isaac’s Senseless Panic featured on his website, or on Fisher Investments’ Marketminder . It’s one of the best books out there analyzing the true causes of the financial panic. The book is pithy and easy to read—well worth it.
Today’s first ever FOMC Chair press conference is certainly the start of something new—but having nothing to do with economic or monetary policy. That I could see watching from Fisher Investments HQ, virtually nothing interesting or heretofore unknown was said. It was all very…political. Bernanke was well spoken, he was empathetic, he was balanced, he was sensible. He was all the things you look for in a politician’s speech.
So what we have here is not so much a new era of improved communication between the Fed and the public, but more like a politicization of the Fed—Big Ben is now an inch closer to being the head of the US economy in the public’s eyes—in some ways almost more than the president. Think of what an evolution that is: just 30 years ago the Fed was barely thought of at all for macro economics, now Bernanke is speaking to everything from inflation to manufacturing to the Japanese earthquake. Said another way, people believe he is in charge, and—gulp—has some mighty control over what the US economy does and is. In reality he mostly sets monetary policy and governs the banks—a vital part, but just a part, of the economy. Ben now seems less interested in saying what is true or what he really thinks than he is in saying things that he believes will be good for the market, good for the economy, will instill confidence in the system, confidence in him, etc. Oh, and also he will talk and behave in ways that preserve his job and ego (recall that this is an appointed post by the president).
The Fed Chairmanship is now—as of today—more of a public figure-headed institution than ever before. Time will tell what that means—the Fed is one of the most evolutionary public financial entities in all market history, and they’ve never been static in their policy or function.
Another tremendous, sterling, must-read analysis from John Tamny today over at Real Clear Markets:
While there will be a spate of global economic data out this week, too, earnings is perhaps the key thing to watch. This week, 180 of the S&P 500 companies are scheduled to report. So far, about 75% have beaten expectations (according to Thomson Reuters). Mind you, it’s common for earnings to beat too low expectations set by analysts and executives.
After a shaky start last week tied to macro fears, from my view, positive earnings ultimately overwhelmed those worries and stocks finished the week up. Expect fundamentals to increasingly drive stock price results this year.
One thing I read frequently among economists as well as the popular press is the notion that things can descend into “death spirals.” Like, “if the dollar goes below such and such a level, it will be in a self perpetuating cycle of devaluation until the currency is dead in the water,” or, “this economy is shedding jobs, which will lead to less consumption, which will lead to fewer jobs, which leads to even less consumption…until we all go to zero.” Etc.
This type of thinking is, in general, nonsense. I’ll agree that in certain situations it can happen. For instance, if a country (like, say, the PIIGS) has its debt yields surge on fears it might default, and then those yields get up to territory where they can’t meet their short-term financing needs, then they’re pretty much on a self-fulfilling course to default. (Mind you, I’m not saying that will happen to the PIIGS, but it’s not an impossible scenario either.) You might even make the same case for something like how Bear Stearns got squeezed in the early part of 2008.
But by and large, this type of thinking has prevailed for a very long time in the court of economic reason and usually ends up wrong. Simply, economies mostly don’t go into death spirals—at some point they hit a recessionary nadir and then recover. This happens time and again, yet people get obsessed with vicious cycles of impending doom.
Right now, this kind of talk is swirling among those who study currencies, with particular worry on the dollar. Think twice before believing in it—currencies wax and wane, but the dollar isn’t going to ruin anytime soon.
Ah, April! Spring has sprung, the flowers are blooming on the hillsides of Fisher Investments HQ, stocks have performed nicely despite some global turbulence, earnings are looking fine, and Congress continues to bicker.
This situation is not so uncommon through the years of market history—the particulars just differ. So, now an inevitable question, and one you can count on hearing many times over the next month: Is it time to “Sell in May and go away”?
It’s not the right question. There’s nothing special about the spring and summer. Sometimes the market rallies, others not. Last year, global stocks corrected over the summer, the year before, not. Both ended up fine years to be a stock investor.
Market corrections can come at any time, for virtually limitless reasons, and evaporate as soon as they arrive. Don’t try and get too cute and sidestep perceived turbulence because of some rule that works about as often as it fails. Inevitably, many investors will make this mistake this year, incur trading costs, and possibly have to get back in at higher levels than they sold. For more mistakes investors are likely to make this year, check out my article: Six Mistakes Investors Are Likely to Make This Year.
- This week, Q1 2011 earnings season gets underway as 110 firms are set to report.
- Investors shouldn’t expect to see the same extraordinary earnings growth of the last several quarters—gone are the easy comparisons to earnings levels severely depressed by recession.
- As we progress through the business cycle, Fisher Investments reminds readers that profit and stock gains likely become more differentiated among sectors and narrower categories this year.
Maybe the most amazing thing about S&P’s announcement on the US fiscal situation is that anyone got riled up about it. Here is a good primer on the report, if you haven’t seen it firsthand. We’ve seen many similar declarations—and years ago—from 60 Minutes to The Wall Street Journal.
That I can see, the report didn’t include any new information other than S&P’s own opinion on the matter. S&P cites a relatively large deficit, rising debt, political gridlock—these have been known to bond investors for a long time, yet yields remain tame and government bond auctions are far oversubscribed. Notably, Treasury yields were down yesterday (4/18/2011), and the dollar was stronger (an ironic twist on the whole “risk on/risk off” situation I’ve before noted on this blog as nonsense).
S&P highlights entitlement programs (Social Security, Medicare, and Medicaid) as “the main source of long-term fiscal pressure.” But entitlements are not the equivalent of debt and can be changed by Congress. Government debt could reach troublesome levels at some point, no doubt, but not in a timeframe that matters to stocks near term. This, and eventual similar reports from other ratings agencies (they tend to move together), could even hasten the political response by enabling politicians to use the AAA rating as a rallying cry to push through unpopular measures like entitlement and other spending cuts…and possibly higher taxes (gulp).
Either way, stay cool: this report’s gusto shouldn’t sink stocks longer-term.
I never know if it’s most appropriate to laugh or to cry on tax day. Here are two articles to make you do both:
Fisher Investments plans to continue hiring in its Vancouver , WA office throughout the spring and summer months of 2011. For information on job opportunities or the full announcement, please visit the Fisher Investments press release.