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Lessons From an Averted Crisis
Posted at 12:09 p.m. EDT on Thursday, June 27
Was it all a dream? Or, more like it, a nightmare? A week ago today, this market was annihilated as a confluence of ugliness -- the Fed's revising of growth, the collapse of the Chinese banks and the riots in Brazil. These weren't Portugal, or Greece or Cyprus. Huge markets, markets like the Philippines and Indonesia and Mexico, pretty much crashed as money came out of their bonds and stocks in torrents. These were very real threats to the bull market in stocks. They were a clarion call that turmoil globally led to buying cash -- not even bonds, specifically the 10-year.
But look what has happened since then. The Chinese, who seemed on the verge of causing a Lehman-like collapse in their banking system, switched direction, and, instead of choking off the bad-actor banks, actually flooded them with liquidity. Brazil? When a million people take to the streets, you might even expect a coup in what had been a stalwart growth democracy, albeit a corrupt one. Now the government is making noises about cleaning up its act and taxing the rich, and the riots have lessened in intensity. Southeast Asia has calmed down, and the Philippines just had its best two-day back-to-back rally ever.
But no change has been more modified than what the Federal Reserve did to backpedal furiously from its statements. We have in this country a history of the Fed not really caring about the consequences of its actions. If the Fed made a move, you lived with it, and the Fed just hung the economy out to dry.
However, within 24 hours and a world of hurt in the bond market and emerging markets, key players in the Federal Reserve, including presumably Ben Bernanke, let The Wall Street Journal, The New York Times and The Washington Post know that the Fed in no way meant to do anything drastic, nothing at all. It was all about watching and waiting to see if we got better data. Since then, we have had some good numbers and some bad numbers in keeping with Fed ambivalence, not Fed action.
Now, we may want to say that we are having one giant do-over in our markets. But that would be false. Interest rates have not come down. Mortgage rates have gone up by a third. We will soon see a dramatic decline in refinancings. The bond funds have produced hideous losses -- that is, if you sell them. The 10-year is not back under 2%, it's up at 2.5%.
And even within the stock market, we don't have the same stocks going higher. Sure, there's been a bit of recovery in the so-called bond-equivalent stocks that were being crushed by the increase in yields. But we are seeing a headlong rush into the cyclicals and into the regionals and into any technology. We can only imagine what could happen if we actually had an up day in China after seven straight down sessions.
So, while it may look like we averted a crisis, a crisis that did have people panicked last year, two things have happened. One, we saw what occurs if we really have the end of bond buying, and it is plenty ugly. You have to scale out of what has been hurt right into this rally: anything emerging markets, as well as stocks in the housing-related cohort, which will be slowed by the dramatic increase in mortgage rates and the higher-yielding stocks that will not be competitive with bonds as they go higher. And two, it's time to get more industrial, more cyclical, because those, not the bond-yield equivalents, are where the values are.
Crazy Like the Fed
Posted at 10:36 a.m. EDT on Tuesday, June 25
Did Ben Bernanke get it right again?
We all think that he handled the signals about QE3 tapering with a level of ham-handedness that was out of synch with his masterful ways. But how about if he saw a raft of better-than-expected news coming out -- news about home sales being strong, news about consumer confidence being high, news about home prices advancing rapidly, news about durable goods being better than expected -- and he knew he had to get ahead of all of these positives to avoid being run over by the market itself.
Now, we know that the bond market takes its cues from many people and many countries and not just the Fed. But we are having a day right now where rates are going slightly higher on this positive news and the stock market isn't being hammered. Maybe this is the way of the world: a lurch toward normalization in the face of data that is undeniably positive. (If you really want to dispute that, I am not going there. Sometimes good news is good news. ) The key to this market going higher is when good data don't drive the market down because it means the Fed is out of step with reality.
This morning, when I interviewed Professor Robert Shiller about the Case-Shiller index, I asked about raising the fed funds rate and it wasn't like he blanched. Instead, he agreed that this is the kind of number that could warrant that type of action. So why buy bonds if that's the case? Why should the Fed play the role of the Dutch boy with the dike?
Now, we can't have a straight line back up. Bonds are getting hit too hard for that. And I imagine at some point, if the bonds stay this weak, we are not going to be able to ignore them and sellers will hit the tape. But it is nice to see, for a moment, that rates could go up and it didn't bring out a horde of selling. I think that's the market getting used to strong data, data that should take the 10-year to 3%, and it can't rally until we get a bond rally on strong news, which isn't too much to hope for after this selloff, believe me.
- backpedaling by the Fed; and
- QE3 tapering.