Let’s expand on the previous post regarding event studies. The big news of the day was the Fed’s new transparency due to the Fed Chief’s press conference. But today’s market action provided more transparency into the Fed’s impact on markets than they’re likely comfortable with. In just 3.5 short hours the Fed managed to spark massive speculative rallies in just about every single asset class. While most markets were trading flat before the FOMC decision almost every single relevant market is up over 1% since the decision. The inflection point is pretty obvious in the following charts.
Stocks ripped higher following the assurances that the Fed would remain accommodative
Oil prices rallied almost 1% following the FOMC decision despite a bearish inventory report in the AM.
Gasoline prices rallied 1% following the FOMC decision.
Gold prices surged over $20 following the FOMC decision.
Is the Fed having a substantial impact on gasoline, oil, equity and commodity prices in general? You decide. If I had to guess though I’d venture to say that the SF Fed won’t be issuing any research reports regarding the Fed’s dramatic impact on these markets and the clear connection between the Fed’s commentary and intra-day commodity prices…I think it’s pretty clear that we should probably trust the BOJ’s commodity price analysis over anything the Fed publishes. Anyone with a working set of eyeballs can see that the Fed is directly contributing to the speculative surge in commodity markets (and all markets for that matter)….
Can you please stop with all these facts?
Madness. Is there not anyone who can step in and stop these madmen? I never thought I’d see in my lifetime what I’m seeing now. They are totally out of control, pedal to the metal, damn the negative consequences. It’s truly scary.
If the average American saw that gasoline chart they’d demand that Bernanke step down immediately.
Hey, Cullen. What your analysis expresses graphically is a very basic fundamental truth. The cheaper money becomes, the more inclined people will be to spend and/or risk it. When you have more than enough water to drink, you don’t care if some spills on the floor. Strong dollar policy, my ass.
He says strong dollar policy because he says inflation is low. That’s historically accurate, however, with 1.5% real gdp in Q1 we’re setting up for a pretty pathetically low bar in terms of real growth. This country needs real growth and real productivity. Bernanke is not helping us achieve that.
Don’t know if I agree with the cpi/dollar correlation. If you try to jack up the money supply, just because the economy does not respond, and velocity and cpi stay low, that does not mean you have a strong dollar policy. It means you failed to stoke inflation. But with commodities soaring, unless prices crash, eventually cpi will follow, or businesses will fail en masse. Furthermore, look at the dollar index. Dollar to gold. etc. I don’t need to point these out to you.
I am just trying to point out how he thinks about it. A strong dollar to BB is about purchasing power. If growth outpaces inflation then BB is not excessively concerned about the USD because he sees the USD as being able to buy more goods and services in real terms.
If that’s how he thinks, I’m even more concerned than before. Thanks.
This is gonna get ugly, maybe not tomorrow but some day soon. Keep close to the exit…
Just give it a little longer, the whole house of cards will topple.
QE3 or not, he’s got trouble ahead, boxed into a corner, currency crisis and trade wars, or let markets go.
I think he’ll go for the latter, to give himself some wriggle room, then come back with more QE at the end of the year.
Won’t make any difference in the long run, the dollar is toast, so is the US.
Friends, check the 3-mth. and 6-mth. avg. annualized CPI: 7.8% and 4.6% respectively, with industrial production at 3.9% and 5.1% annualized, M2 at 4.2% abd 4.7% annualized, employment at 1.9% and 0.6% annualized, and wages at 3.4% and 3% annualized.
Accelerating price inflation is exceeding the aggregate of private production, wages, and employment; therefore, the only inflation-adjusted growth that is occurring is that resulting from the 22% annualized growth of federal gov’t spending in Q1.
Accelerating prices, largely oil induced, will hit hard profit margins, which in turn will cause the annualized rate of private fixed investment to decelerate abruptly and contract q-q at some point later this year, resulting in a decline in production and employment by Q3-Q4 and into ’12.
As in late ’00 and spring-summer ’08, the stock market has yet to discount this cyclical development for top line revenues, profits, production, investment, employment, and consumer spending. When stock prices do reflect the herd “gets it”, watch out below.
With QE2 over, we need a 20-30% stock market crash in 4-6 weeks for QE3 to be announced.
Dear Kenneth Rogoff,
“I'm disappointed that NO ONE including yourself pressed Bernanke on his role in this crisis. And why HE thinks he can help when so far he and his predessorsor were key players in the cause of what he thinks he has a handle on. After everything…that is the question you ask? Maybe you can get tough with him at the next chess match at the Harvard club. You should have thrown your book at his head” (this is where we envision the book being caught by Ben who then repatriates the paper into dollars sometime in October when QE3 is launched)
Glad you are finally seeing the “light”. Now bring on some more of your rosy cheerful articles so we can all feel better.
If you think I’ve ever maintained that the Fed doesn’t induce speculation in markets then you haven’t been reading closely enough. There is nothing new in this commentary that I haven’t been repeating for years….
Yeah dogismyth you are absolutely lost if you think that. Go back and read the other articles. Not sure what planet you are functioning on.
Ride with the crazy commodity bubble, or screwed up by Bernanke. What else can we do?
All he (bernanke) needs to do is raise margin requirements! Have not checked in a couple weeks, but last I looked we were at record levels just like 2000 & 2008.
QE may go on forever. Hyperinflation hits when people stop believing in the currency. Unfortunately-we may see hyperstagflation, being Ben is NOT making any progress with qe experiment. We have the first country that is not believing in our currency.
Being the fed now is the sole buyer of our treasuries..he will have NO choice but to continue qe if China follows through..read below-it will be a game changer!! If he doesn’t see inflation now..or at least trying to make people believe there is no real inflation..he may have a hard time selling that at his next press conference.
I believe hyperstagflation will hit BB right in the eyes..and before he can say UNCLE-his QE experiment will finally get the F it deserves…read what China has in mind for BB.
BEIJING, April 23 (Xinhua) — China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday. The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high. China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.
Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves. Meanwhile, Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.
The only thing that matters is the stock market. This is why you see riots in emerging countries when it goes down more than 5% in a single day. Keep equities up and everything else is irrelevant. So long as this is true, everybody can carp all they want about how he’s destroying the country and the dollar while he remains comfortably above the fray of it all, untouched and pleased with his policy results.
The stock market is not the economy. The stock market represents the bets made by the people that exist in the real economy. It is nominal wealth. Not real wealth. The real wealth is in the productivity and output of the underlying companies. Propping up the stock market does not mean the Fed is propping up the real economy…..
The two ideas are one and the same. Soros’ idea of reflexivity best describes the relationship. Nominal wealth creation in equities does in fact unleash the animal spirits which in turn provides the confidence needed to jump start the private sector real wealth creation engine. So, if you take a step back from the text book definition from your last post and at some level agree with this conceptual relationship, you can also make the leap to believing that “supporting” or “propping up”, however you’d like to describe it, the stock market, can in fact induce a greater degree of strength in the real economy that might not have been there otherwise.
And I might not be so willing to believe this were the real economy not entirely ripping the cover off the ball right now. But look at the numbers companies are reporting, despite the input cost increase; it is truly amazing. Revenue growth is accelerating sequentially and more companies are beating revenue estimates than during any quarter since Mar-09. And as such, the stock market is responding as it should.
One might also now make the case that this accelerating revenue growth could beget confidence at the corporate level to accelerate hiring and wage growth. The cycle would then be complete and Bernanke could remove his untraditional policy measures.
Until company results stop getting more robust sequentially and in the absolute and equity prices start to fall, it remains very tenuous to argue against Bernanke from my vantage point. I’m done doing that.
Companies are reporting great earnings for 3 reasons – they have fired millions of workers, the govt is filling the spending gap and Asian economies are firing on all cylinders. Meanwhile, in the USA, the domestic economy remains weak at best and without the govt spending it would be sinking. And if you think the Fed is helping all of that then I don’t know what to say – you haven’t been reading my work. The Fed is entirely counterproductive in all of this. They promote debt and unproductive economic activity. That’s just how monetary policy works. And it works great outside of a balance sheet recession.
As for stocks and the real economy – I just don’t buy the notion that higher equity markets are a virtuous cycle. If that were true these booms would never lead to busts. Instead, we keep seeing the exact opposite. The booms lead to the busts because the markets get ahead of fundamentals. Nominal wealth outpaces real wealth and the piper gets paid. It works until it doesn’t work. And when it stops working we get 2008….
I’ve never worked at a company that determined whether or not to pursue a project based on their price per share. I think ROI and NPV is more important than whether or not their options are in the money. Sure, Bernanke may lower the cost of capital on projects, but there is an excess of capacity out there in many industries. Bernanke can’t force that money to go into investments. Instead, it’s going into liquid assets through financial intermediaries. How you can argue that QE will force companies to invest in illiquid assets like R&D, cap-ex, and labor is beyond me.
As for earnings, wait till Q2. Management won’t no longer be able to dance around Japan’s impact on their bottom line. The numbers won’t lie. Did you notice how ROK and PH were treated today after talking about Japan?
In the meantime, stay long unless 1337 doesn’t hold.
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