VOL. 127 | NO. 154 | Wednesday, August 8, 2012
The Worldly Investor
What’s On, What’s Off Economic Table?
By David Waddell
On the Table: Conversational Easing With the data stream lukewarm at the moment, markets needed policy support for handholding. Recent history demonstrates that when market anxieties rise, fiscal and monetary authorities intervene. We have described this as the “Punch/Counterpunch” market.
Two weeks ago, when yields on the troubled European sovereign bonds started landing haymakers, Mario Draghi (the head of the European Central Bank) surprised markets and declared, “the ECB is ready to do whatever it takes to preserve the euro ... and believe me, it will be enough.” Immediately, troubled sovereign yields fell and stock markets worldwide rallied. Nice counterpunch, Mario!
But before Mario had a chance to officially present his plan last Thursday, the U.S. Federal Reserve took the stage for their regularly scheduled program on Wednesday. Unlike the Europeans, the U.S. Fed has shown ample willingness to print money to placate markets. Problem is, interest rates in the U.S. are already incredibly low, and while a significant U.S. Fed action might boost confidence, the direct stimulus effects of marginally lower U.S. interest rates would likely be minimal. Knowing this, Bernanke elevated the probability of Fed action in his remarks, but did not elevate the money supply.
Markets yawned and flipped back to the European Central Bank program. When Mario took the stage last Thursday morning, stock futures shot higher in expectations of big things … it was so exciting! While interest rates in the U.S. might not benefit much from money printing and bond buying, interest rates in Europe could fall substantially, removing significant pressures from the marketplace.
Low yields would buy time for reforms and might foreshadow the issuance of the crisis-ending Euro bond by which strong European nations would explicitly underwrite weak European nations. Before the crisis, everyone assumed Germany would backstop Europe and yields converged. A Euro bond would represent explicit allegiance and yields would converge again. With the crisis in retreat, confidence would return, economies would expand, market values would normalize and we could move on with our lives. “Oh, please Mr. Mario, please print euros,” I chanted softly to the TV.
Unfortunately, Mario’s message disappointed those seeking immediate action. Rather than turning on the printing press to buy troubled sovereigns, he outlined his strategy to curry German support for future action. More process, less progress. However, as the day wore on, markets recovered, recognizing that while the QE rally fuel may still be dormant, the mutual commitment of intent from the Federal Reserve and the European Central Bank makes this a dangerous market to sell. We did not receive immediate quantitative easing … but we did receive heavy conversational easing … no rockets, but no anchors either.
Off the Table: US Recession On Friday, the recalculation of Draghi’s statement and an encouraging U.S. job report inspired a 217-point gain in the Dow. With the jobs number reducing recession odds and central bank talk increasing stimulus odds, markets are in rally mode. Checking the scoreboard, the S&P 500 now trades a mere 2 percent below its 2012 high. Wall of worry indeed!
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.