Getting a read on the Fed

The markets focus is upon working out when the Fed will begin its exit from quantitative easing.

Some would say that it has already begun with the dismantling of various "market support" programs. The critical element will be when they begin raising the Fed funds rate.

With the knowledge that any "real" exit could send the economy in the tank again, I wonder whether the reality is that the Fed has little intention of raising rates anytime soon (read that in the next couple of years).

Any increase in rates will weigh heavily upon the economy, the govt's expenditures, and the markets. In many ways, the Fed has no choice, but to try and keep rates at ZIRP until it is patently obvious that the economy is totally recovered. In the same way that the govt is "all-in" on the fiscal side (and is committed to doing whatever is necessary to keep things from going back down), the Fed is in a similar boat. In spite of it's credibility and reputation being on the line, the Fed has little choice, but to keep rates low. Any removal of the foot from the pedal stands a high likelihood of choking off recovery (all that ZIRP for nothing). It has to go "all-in" on the monetary side. Failure to put the economy back on an even keel means we are left in a worse position than when we started.

With the Fed's priority upon the recovery of the economy, it has to risk inflation and the debasement of the currency in order to get us through this period.

Above the fray

My day is a panoply of information. From sign-on to sign-off, it is all about gathering and processing the latest information.

It is one thing to gather and process information, but at some point, you need a view, a conviction. And rather than seek additional information to either affirm or deny that view, you need to take a step back and process the current zeitgeist, as translated by the markets, in the context of that view.

It is the ability to stand above the fray and discern the general forces at play that I most admire.

Is Greece the tip of the iceberg?

Have we seen this before!

Is Greece the tip of the iceberg?

Is Greece like New Century Financial Corp signalling the beginning of the fall in the sovereign dominos?

Only time will tell. It may, or it may not. If failure in Greece is the tipping point, then it will be all too obvious in hindsight. If it isn't, then it will be quickly forgotten as a footnote.

Forest for the trees

I feel as though I am so caught up in the day to day fear wranglings that are our present situation, that I risk missing the forest for the trees.

One of my problems is that my short term outlook is heavily influenced by my longer term outlook (hard sledging ahead), and it is hard to get away from that.

But at another level, I have the feeling that if only I could step back from the fear abyss, I could see that the market is fine and the current fearalysis provides opportunity on the upside.

Let the Good Times Roll

Sort of as a contra-note to the previous post*, I want to remind myself of recovery mathematics.

The economy is bottoming and beginning the process of healing.

There are two points to make. First, the damage inflicted by the severity of the recession means it will take a long time to regain previous economic highs. Second, the YOY and MOM change numbers will look real good going forward.

The great thing (if you can call it that) is that asset prices were re-set when the economy imploded. As such, expected returns going forward will probably mirror the rate and extent of recovery.

In an environment where systemic risk factors and secular headwinds are in play, however, it is hard to see equity markets getting too exuberant, even as positive economic numbers come in. There again, that might be ascribing a level of rationality to the market that it does not warrant.

Depending upon how you look at it, it will be both a lost decade and a growth decade.

*The post was really about risk factors. Always got to keep an eye on the downside.

Living with the sword

Better get used to the daily angst of living with the sword of Damocles swinging overhead.

The world's economic problems are structural in extent, systemic in breadth, and long term in nature.

There are no short term fixes for the imbalances and problems that have been brought to the surface by the financial crisis.

With the possibility of a bomb going off at anytime, the market will struggle for sustained confidence and likely vacillate in ranges.

Big bang vs slow drip

Big bang changes like 1.50% drops in Fed Funds rates, or $750 billion stimulus packages, or $700b TARP-type packages are only possible in crisis situations.

But once the panic is over, there is still a need for enacting good policy. And often, that policy change is more important for the long term health of the economy than the immediate response to the crisis.

But getting major policy change enacted becomes more and more difficult the further away from the crisis you get. It becomes like a slow drip to the electorate as they lose focus and move onto other things.

Death by a thousand cuts.