A Pro, or a Con?
Yesterday’s market action was a stunner. At midday, the Dow Jones Industrial Average was up 155 points, or roughly one percent. Within 90 minutes, it had plunged 235 points, closing at -86 for the day. What happened? Well, Ben Bernanke made comments that the Fed may begin to curtail its QE bond buying activity. Obviously, the market didn’t like that. The marketplace has gotten accustomed to a Fed that provides its own economic underpinning for market prices. Steady pressure from the Fed to keep interest rates low could finally be thawing. It’s like watching a drug addict going through withdrawals. Yesterday was the first convulsion. With the market down another 1% today, can you imagine what will happen in the future when the Fed finally announces its actual “plan to act”, as opposed to yesterday’s discussion of its choices of actions? A 3% slide at the mere hint of the withdrawal of Fed support suggests the marketplace thinks the economy would be on its face without Fed intervention. This makes one wonder about the wisdom of owning risk assets with an increasingly fickle and political character calling the plays. Recent scandals and government bullying will only exacerbate the perception. If you question my characterization of bullying, look no further than this week’s testimony by Apple’s CEO. Mr. Cook was testifying before an inquisition panel this week about Apple Computer’s use of the IRS’ own rules for account offshoring; a practice Apple has maintained for 33 years. I contend that the government will never be able to craft a complex enough set of rules to trap the entities it seeks. The trap itself will provide the method of escape. The simplest machines tend to lift the heaviest loads. This is why I foresee a flat tax coming.
The eventual withdrawal of government support in the marketplace will come as a two-edged sword. On the one hand, one would perceive that the Fed at least believes the economy is gaining a more sound footing. On the other hand, it begs the question about what the future will look like without the intervening trunk of the elephant in the room. We are all trying to read the tea leaves. Mr. Bernanke has a history of coming back to the microphone to clarify. Since he recently spoke about his commitment to the bond buying program, I perceive yesterday to be the clarification. He would sure seem like a waffler if he came back today to provide more info. Given the market’s rip-roaring run recently, this would seem a good spot for the market and eager buyers to take a rest.