Market Talk

One of the more absurd parts of the FOMC’s statement today is the committee’s references to their mandate of fostering price stability.

Judging by the crazy gyrations in financial markets after the FOMC’s QE2 announcement, there wasn’t much “price stability” being fostered there. Of course, it’s not unusual to see choppy moves after a Fed statement, but today’s seemed extra exaggerated, with abrupt turns, stomach-tickling drops and dizzying climbs all jammed into less than an hour’s worth of trading.

It’s been clear since the Fed signaled a couple months ago its intent on more QE that the plan was to provide plenty of cheap cash for speculation in order to inflate asset prices and hopefully create a wealth effect to spark consumption. How well does that m.o. align with a mandate to foster price stability? Continue reading…

We’re not tough enough to take the pain.

That’s why it’s come down to this, citizens — the Fed priming more QE, doing “whatever it takes” to alleviate the hardship. The ceaseless efforts to artificially prop up asset prices. The extraordinary amount of Americans’ monthly personal income now derived directly from Uncle Sam.

It should be much more expedient and ultimately less costly for the government to simply step back and let the economic chips fall where they may. But it’ll hurt, and the nation’s leadership doesn’t think we citizens can handle the sting.

Indeed, we often come across like a society of coddled whiners who can’t stand to even be the slightest bit inconvenienced, never mind subjected to any degree of physical or psychological travail. We can’t handle bad reception on our iPhones, why should the government expect us to deal with the hardship that would come with allowing home prices to reach their natural level, to finally unleash market-clearing prices and probably the failure of more big banks and other institutions? Continue reading…

GMO’s Jeremy Grantham continues to be among the most coherent, rational and entertaining voices commenting on US markets and the economy. His latest quarterly piece is the usual must-read, titled “Night of the Living Fed.” Here’s a little taste:

In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Enjoy the rest here.

These central bankers all walk around in their suits and ties, and talk in these dull monotones and use a lot of big words, and most people have absolutely no idea what they’re talking about. A stance that would match their words better, would make their intent much clearer, would be if they were running around like the nutty professor in Back to the Future, and holding a big, round black bomb with the fuse lit.

The Bank of Japan announces a monetary easing program to spur economic growth, and cuts its interest rates to essentially zero — again — and the reaction is, well, this may help, it may not. Our central bank chieftain, Ben Bernanke, last night speaking to college students, opined ever so dryly that “additional (asset) purchases have the ability to ease financial conditions.”

What he should have said was “fire!”

This is just ridiculous. Do you see what they’re doing? The Japanese are trying to debase their currency. The Fed here in the United States is doing the same thing, although they’ll never say it. The Chinese don’t debase it, exactly, but have been ruthlessly suppressing it (and, actually, it seems to be working out rather smashingly for them.) Debasing the currency is about the most desperate thing a central bank can do. It never ends well. But this is the path they’ve chosen, and to change direction now would cause even greater carnage.

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She may just stay in port, folks.

Indecisive, choppy trading leaves stocks modestly lower in a session where the biggest influence was movement of EUR/USD.

Dollar abused again, euro parked above $1.36 and major US indexes seemed to mime every twitch and jog by EUR/USD. Materials, financials lead sector decliners, while energy and tech end in positive territory.

Lots of data coming tomorrow and Friday; comments from Fed officials today seemed to suggest bad economic data alone won’t warrant QE2 — only specter of worsening deflation will bring out the big guns. Philly Fed’s Plosser said as much, noting that beyond cutting rates (which is over and done with), the Fed can’t do much to help the labor market, and the central bank’s credibility is on the line if more asset buying fails to create the desired effect.

Weekly jobless claims, a third look at 2Q GDP and more regional manufacturing gauges all due tomorrow.

DJIA slips 22.86 to 10835.28, and Nasdaq Comp falls 3.03 to 2376.56. S&P 500 ends 2.97 lower at 1144.73.

(Photo courtesy of Wiki Commons.)

- The recession getting an official ending isn’t a surprise, but it doesn’t change the fact that to the average Joe, it doesn’t feel like the recession’s over. “Obviously, the employment picture is still dismal, and people complaining that policymakers should focus on labor markets rather than output have a point,” Ryan Avent says. “It’s just not one that’s particularly relevant to what the NBER Dating Committee does.”

- – NBER says recession’s over, but it’s not clear employment has bottomed out yet. “That is my worry about this call,” writes Mark Thoma. “Whether or not we stay near the trough for an extended period or move gradually but consistently back to full employment is an open question, but I don’t think we can discount the stagnation outcome.”

- Many strategists have been cautiously optimistic about the September rally because it has come on low volume, but Reformed Broker blogger Josh Brown says he actually prefers a low-volume breakout. “Nobody is in,” he says. “Fear is the conductor of this train right now, period, end of story…Fear of missing out is exactly why a stealth rally in stocks with low participation would be more meaningful and bullish than almost any other scenario.”

- Expect an interesting week ahead, says PIMCO CEO Mohamed El-Erian, as Europe’s debt crisis returns to spotlight amid increasing solvency concerns. And global configuration of currencies is quickly becoming hot-button issue. “This week will shed light on whether policymakers can do anything to deal with these two issues,” he says. If they continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.”

- Calculated Risk blogger Bill McBride doesn’t expect any major changes to tomorrow’s FOMC statement. Too soon for Bernanke to comment on further easing, especially considering his Jackson Hole speech. “Bernanke suggested that additional easing would probably require ‘significant weakening of the outlook’ or a meaningful decline in inflation expectations (or further disinflation),” he notes. “The first hasn’t happened yet…although they might express more concern about disinflation this week.”

- Paul Krugman provides more evidence that unemployment remains high because aggregate demand is too low. “Every single major industry has seen a rise in involuntary part-time work; so has every major occupation,” he says at Conscience of a Liberal. “There’s no hint that any major kind of labor, in any sector, is in short supply.”

- Weak demand remains most important factor holding back job growth. But it’s not the only factor, James Hamilton argues at Econbrowser. He points to latest NFIB data which show respondents say sales are their biggest problem, but they’re increasingly worried about taxes as well as government regulations.

- S&P 500′s double-digit percentage rally off July lows has been broad based, lacking a particularly strong sector during run-up, Bill Luby writes at VIX and More blog. Materials and industrials have been top performers, while consumer discretionary and tech have recently shown signs of life. “Consumer and financial sectors cannot afford to be a significant drag on stocks or the current rally will likely run out of steam.”

- Google (GOOG) CEO Eric Schmidt recently said he wants to add social networking to the company’s core products and services. “When I read those remarks, an alarm bell went off in my head,” Mathew Ingram writes at GigaOm. “To truly be successful, social media or social networking…can’t just be bolted onto what you are already doing. It’s not a software upgrade or a hardware fix…social just isn’t something the company understands very well.”

- Here’s a perfect example of an inspiring hypomanic entreprenuer: “I had friends at Princeton; I’m sure it’d be fun to see them,” says 21-year-old Seth Priebatsch. “But I know that what I’m going after is huge and others are going after it, and if they’re not, they’re making a mistake. But other people will figure it out, and every minute that I’m not working on it is a minute when they’re making progress and I’m not. And that is just not O.K.”

Shut your eyes, citizens. Just shut your eyes.

Not so hot, friends and countrymen, not so hot at all.

This morning’s reports on consumer prices and inflation-adjusted earnings, what they call “real” earnings, were both broadly flat, and when flat is not what you’re looking for, not what you’re looking for at all, that’s not a very good thing.

Consumer prices excluding food and energy, the s0-called core prices that get so much derision when everybody thinks the government’s trying to mask inflation by excluding those two categories, were flat, the Bureau of Labor Statistics reported. On a yearly basis, prices were up 0.9%. When you consider, too, that the Fed kept its fed funds interest rate at zero that whole time, then those numbers are very precarious indeed.

The news on wages wasn’t any better. Average hourly wages were flat in August compared to July, and up 0.5% compared to a year ago. If you think a 0.5% raise over a year is enough to cover all the necessities of life, then God bless you.

What these two reports show is an economy that is basically stagnant, with a not-insignificant chance of getting worse. Wages aren’t growing, prices aren’t rising, and all that ties back to the fact that everybody is still in the middle of this great unwind, this broad deleveraging of debts. We aren’t going anywhere. Indeed, even a cursory glance at the news over the past day or two tells you we’re going backward: a Census Bureau report shows that wages fell over the past decade, while the bureau also reported that now one in seven Americans, 43 million people, are living in poverty.

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- “We have the specter of Greece’s finance minister insisting really, no really, it will never ever default, or default via restructuring,” Yves Smith quips at naked capitalism. “Now given the unfortunate accident of timing, these protests sound awfully Dick Fuld like, although the better parallel is probably Mexico, which kept insisting in 1994, no way, no how would it need to restructure, despite having a lot of dollar denominated obligations and an untenable currency peg,” she adds. “And it was OK, until it wasn’t.”

- As chatter ramps up about new stimulus plans, FusionIQ CEO Barry Ritholtz has his own ideas for what he would do if given $1T to stimulate the economy. “Some folks believe the government should do nothing, spend no money, focus on balancing the budget,” Ritholtz says. “But is the ideal time to begin a new diet and exercise regime when you have pneumonia? The time to reduce the government’s economic deficit and footprint is during a robust expansion, not during (or just after) a contraction.”

- S&P 500 still hasn’t eclipsed its August highs, but market breadth has indicated underlying strength in the September rally, Bespoke Investment Group says. About 80% of S&P 500 stocks are trading above their 50-day moving averages, which is higher than last month. “This isn’t quite to the highest levels seen over the last year, but it’s getting close.”

- “It takes jobs to create households, and usually housing is the key driver for employment growth in the early stages of a recovery,” Calculated Risk says. “So this is a trap: the excess supply means weak employment growth, leading to few new households, so the excess supply is absorbed slowly — putting off more robust employment growth.”

- JPMorgan Chase (JPM) finally issues a formal apology for the web problems that plagued its online banking service earlier this week. “We are sorry for the difficulties that recently affected Chase.com, and we apologize for not communicating better with you during this issue,” JPM says on its website. The apology is notable as many bloggers and folks on Twitter had criticized JPM for its failure to properly communicate this issue with its customers.

- Google Voice cofounder Craig Walker is leaving his role as a manager of real-time communications at Google (GOOG) and returning to his entrepreneurial roots. Walker, who was previously chief executive of Grand Central and renamed Google Voice after its acquisition by GOOG in 2007, will become Google Venture’s first resident entrepreneur, TechCrunch reports.

- “With two strong divergent opinions on gold and low implied volatility levels, this could be an excellent time to buy options in order to establish speculative long or short positions in the metal,” Bill Luby writes.

- All Things D blogger Kara Swisher doesn’t sugarcoat her thoughts on Yahoo (YHOO) CEO Carol Bartz. “Her actions in regards to the Internet giant’s Asian relationships are about as bad as it gets these days.”

- Poverty rate climbed to 14.3% last year, while those lacking health insurance rose to 50.7 million from 46.3 million. Incomes fell slightly as households relied on government and family aid to weather the recession.

- For the city that never sleeps, take a look at some of Central Park’s midnight runners.

Gluskin Sheff’s David Rosenberg rips apart the Obama administration’s latest “emerging program to jolt the economic recovery from its stall,” as the NY Times characterizes it (don’t you dare call it stimulus.) I can’t recall seeing Rosenberg this overly political before; usually he keeps to purely economic themes. It’s safe to say he isn’t a fan of the latest ideas.

I’d argue that the Bush tax cuts didn’t have nearly as much to do with the Aughts rally as the Fed’s low interest rates did, and the booming business in unregulated derivatives, but that’s a quibble.

My great problem with the Obama administration is that the President didn’t go full-bore at the economy the day he got into office. Sure, he pushed the $800 billion stimulus program. But while the price tag was massive, the effort itself was lazy. About the easiest thing in the world for a government to do is to throw money at a problem. I’d rather have seen some creative solutions. Something, anything. Instead, we got a rush job with the stimulus program, and then the White House moved on to more “important” matters, like healthcare.

Anyhow, the latest raft of proposals, which add up to a second stimulus program no matter how they are characterized, are likely to have the same temporary, sugar-rush effect of the first program, if they have any effect at all. As Rosenberg points out, the biggest problem for corporations isn’t exactly a lack of cash.

Aren’t businesses sitting on a record cash hoard right now? In other words, “money” is not an impediment towards business investment growth, say, as much as the regulatory policy backdrop.

This is again one in a long list of quick fixes aimed at boosting domestic spending and is likely to have muted impact, in our view. Even if it does have an impact, it will merely bring forward spending that would have occurred in any event and merely distort the quarterly flow of GDP data much like ‘cash for clunkers’ and the housing tax credits did for the household sector.

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Bernanke launching "unconventional measures."

Sounds as if former Fed vice chairman and Princeton professor Alan Blinder has changed his tune a bit. Hat tip to Gluskin Sheff’s David Rosenberg for pointing out this Blinder quote in a NY Times story late last week:

The Fed has run out of the strong tools, and is turning to the weak ones…When you’re fighting in a foxhole and you’ve used up the machine guns and hand grenades, then you pull out the swords and start throwing rocks.

The Times went on to quote Blinder as saying the economy seemed “substantially worse” than it did three months ago.

Interesting, Alan. Three months ago, eh? That’s around the time the good professor penned an op-ed for the WSJ (so rich we had to clip it out and save it in the bottom file drawer), titled “Government to the Economic Rescue.”

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