I don't think this is what Bernanke had in mind.
Stocks plunged Wednesday morning, a day after the Federal Reserve announced plans to keep the spigot of easy money wide open. What, if anything, should you make of this?
First, the details. Since 2008, the Fed has loaded up its balance sheet with mortgage-backed securities (MBS) in an attempt to shore up the housing market and spray cash throughout the economy. It stopped buying these securities in early April. Since then, there's been a "passive" decrease in the Fed's MBS holdings as mortgages have been repaid. Yesterday, the Fed announced that it will start using the cash from these repayments to purchase Treasury bonds so that the size of its balance sheet stays the same, rather than gradually shrinks. This doesn't constitute "printing more money" per se; it's just a cessation of the natural money destruction that occurred through MBS repayment.
The message, though, is clear:
- It took all of 120 days of slowing economic growth -- not even a decline, just a growth slowdown -- for the Fed to jump back in the saddle. These guys have absolutely no tolerance for anything less than strong growth, and will pull every lever possible to ensure it. Some find this encouraging. Others think it shows Bernanke is a doctor eager to perform chemotherapy on a patient that just needs a good, solid, nap.
- Buying Treasuries with MBS proceeds is primarily an attempt to drive Treasury yields lower. But aren't they already low enough? The 10-year Treasury note yields 2.7%. 13-week Treasuries yield basically nothing. Today's weak economy has nothing to do with interest rates that are too high and needing to come down. It's about consumers and businesses that are trying desperately to delever. A Reuters article this morning summed it up nicely: "[Consumers] think that interest rates seem to be continuing to go down, they don't expect home prices to go up, so instead of moving into home buying they're saving money for a downpayment, they're trying to improve their credit." That's your classic liquidity trap.
So that's what the Fed's doing. Why did stocks take it so negatively?
Attributing reason to any one day's market action is mostly futile. Cyborg traders run the show, after all. But some rationale for the market's reaction might be found in the Fed's own words. Two weeks ago, Bernanke remarked that the economy was "unusually uncertain." He's right, and part of this uncertainty is over Fed policy itself. Investors just want to know what the Fed is going to do -- they want clarification, certainty, and predictability. Yet after 120 days of unacceptable growth, here we go again: another policy change. This trigger-happy attitude adds fuel to the uncertainty fire.
Who wins here? One obvious beneficiary are banks with strong arms in bond trading. Goldman Sachs
Yes, there's an awful lot that's unknown out there. But think about the feelings of relative economic certainty and confidence that prevailed in 2006, or in 1999. They turn out to have been entirely misplaced. It's the investments made in boom times like that which end up losing people the most money and sending the most companies into Chapter 11. Investing right now may seem scary and dangerous, but chances are that it's a lot less dangerous than investing three or four years ago.
Thoughts? Disagreements? Sound off in the comment section below.
