The market correction that began in January appears to be subsiding, at least for the moment, as Yellen's recent testimony gave markets the promise of the continuation of Bernanke's legacy. A synopsis of her "accommodation supportive" comments (courtesy of Bill King) is below:
* The recovery in the labor market is far from complete.
* The hope is that by stimulating more borrowing and spending, lower interest rates can jumpstart the economy. [Of course, we are still waiting for that to actually happen]
* QE tapering is "not on a preset course. The Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."
* Asset prices are not at "worrisome levels." [This statement caused the midday surge.]
* The Fed will have to keep rates near zero "well past the time" that unemployment crosses below the 6.5 percent threshold; and the Fed will be an active participant in increased bank regulation, specifically focusing on avoiding the too-big-to-fail problems
With the markets back into rally mode, for the moment, this week's "Things To Ponder" focuses on some of the bigger issues concerning the effectiveness of QE, investing and that chart of 1929 that has been making the rounds.
1) QE Is A Mistake - A Big One by Allan Meltzer of E21
If you review the Yellen's comments above, she stated that the "hope" of QE was to stimulate more borrowing and spending. Unfortunately, as shown in the chart of M2V below, it has simply not been the case.
Allan Metzer wrote a terrific article for E21 driving home this point:
"The Fed deserves high praise for the first round of QE in 2008. However, the benefits ended long ago. More than 95 percent of the reserves that the Fed supplied under QE 2 and 3 sit idle on bank balance sheets. M2 money growth for the year to the end of January 2014 is less than 5.5 percent. There is no mystery about why inflation remains low.
The mistaken results of QE policy include Federal Reserve financing of outsize budget deficits. No one should require a tutorial about the longer-term consequences of using central banks to finance government deficits. Sooner or later the results are inflation, always and everywhere."
2) The Cash On The Sidelines Myth by Pater Tenebrarum via Zero Hedge
In a recent interview by JP Morgan's Tom Lee, he asserted that:
“This could be only the middle innings of what could be one of the longest bull markets in history," Lee said in a "Squawk Box" interview. "There is a lot of firepower to fuel this rally. There is a lot of cash on the sidelines, consumers have delevered."
Pater dismantles this very ill-founded argument, a pet peeve of Cliff Asness as well, in great detail.
"Let us think about this statement for a moment. What is 'cash on the sidelines' even supposed to mean? We submit that it is a meaningless concept. All stocks are owned by someone at all times, and all cash is held by someone at all times. When people trade stocks, all that happens is that the ownership of stocks and cash changes hands. There is as much 'cash on the sidelines' after a trade concludes than there was before. There are no owner-less orphan stocks flying about in the Wall Street Aether, waiting to suck up cash.
In other words, the 'cash on the sidelines' argument is a really bad argument, or rather, it's not an argument at all."
3) Can Earnings Get Better Than This? by Tom McClellan via Pragmatic Capitalist
"The conventional stock market analysis world revolves around earnings. 'Earnings drive the stock market,' they say. This myopic view is akin to the belief that carbon dioxide is the driving force behind the greenhouse effect (water vapor actually accounts for 90-95% of it, but you don’t hear that). People believe that earnings are everything because they have been told that it is so, and everyone thinks so, therefore it must be so. Circularity of logic and contradictory evidence do not seem to be significant impediments to the acceptance of this belief system.
This week’s chart looks at the BEA’s data on corporate profits.
Why doesn't everyone look at earnings this way? My answer is that Wall Street has a fascination with its own forecasts of earnings, and with the reported earnings of listed companies stocks. But those are a pair biases which excluded private company earnings, and which also accept earnings estimates which are notoriously subject to revision. I prefer to deal in hard data. The next BEA report on earnings is not due out until Feb. 28, so using these data means accepting the inherent reporting lag.
What we see now is an indication that the reading for overall corporate profits as a percentage of GDP is at one of the highest levels of recent years. And when it cannot get higher, it can only get lower. It is true that this measure has been higher in the distant past, but that was back in the 1960s and earlier, when GDP was a bit different than it is now, and when accounting standards for measuring profits were also different. The current high reading has only been exceeded once in the past 46 years, and that was at the real estate bubble top for earnings back in 2006. And we all know how that ended."
4) Everything I Know About Investing I Learned From Drivers Ed by Jason Zweig
Jason's articles are always a must read as he has a brilliant ability to very complex issues into an understandable, and enjoyable, format. His recent piece on investing is no exception and well worth your time to read.
"Only recently did I realize that his messages apply at least as much to investing as they do to driving. Here are the pithy expressions Mr. Terry taught us about driving – and how I think they apply to investing as well.
Put Your Head on a Swivel - Risk is all around you, and the likeliest places to look for it are the places that appear to be the safest. That’s where the next danger will come from – just where and when nobody is looking.
Edge On, Edge Off- Making a sudden change in your plan is usually a mistake. Making a sudden, big change in your plan almost always is.
Get in the Ground-Viewing Habit - It’s what is beneath eye-level that matters
Give Him Room and Let Him Zoom - People who try to get rich quick don’t end up any farther along – and take a lot more risk, and incur a lot more cost, to get there. You don’t get bonus points in investing for arriving at your destination ahead of time. The only thing that matters is getting there in one piece."
5) The 1929 Scary Chart via Bill King, The King Report
The chart below, which compares the 1929 stock market to today, has been making the rounds stirring up quite a bit of angst. I thought Bill did a good job of dispelling some of these concerns.
"There is another factor that drove stocks higher on Tuesday – some of the 1928-1930 algorithm followers are now covering their shorts. [Especially after the S&P 500 blew threw 1800]"
"In our missive on Monday we stated: We believe that the current stock market will now diverge from the 1928-1930 algorithm. For the near future we cannot see or fathom a catalyst for a stock market crash. Plus, it's the wrong time of the year for a dramatic decline in stock prices.
PS- Several people voiced irritation with our forecast that stocks would not tank in coming days.
Apparently a critical mass of traders now realize that stocks are diverging from the 1928-1930 algorithm. This unleashed massive short covering on Tuesday.
This story by Mark Hulbert appeared yesterday on Drudge: Scary 1929 market chart gains traction
There are eerie parallels between the stock market's recent behavior and how it behaved right before the 1929 crash...
Tom Demark [has a huge hedge fund and institutional following] added in interview that he first drew parallels with the 1928-1929 period well before last November. 'Originally, I drew it for entertainment purposes only,' he said—but no longer: 'Now it's evolved into something more serious.'"
I agree with Bill. Statistically speaking, the odds are high that the markets will diverge from the pattern. While history does indeed rhyme, it often does not repeat exactly. Do I think that eventually the markets will have another major reversion? Absolutely. The natural ebb and flow of market dynamics tells us this will be the case. Unfortunately, we just don't know when or what will cause it.
Bonus Reading: 77 Reasons You Suck At Managing Money by Morgan Housel
"People usually get better at things over time. We're better farmers, faster runners, safer pilots, and more accurate weather forecasters than we were 50 years ago.
But there's something about money that gets the better of us. If you look at the rate of personal bankruptcies, financial crises, bubbles, student loans, debt defaults, and savings rates, I wonder whether people are just as bad at managing money today as they were in previous generations, maybe even worse. It's one of the only areas in life we seem to get progressively dumber at."
Yes, there are indeed 77 charming nuggets of wisdom contained within the article, all of which are worth every minute you spending reading them. They are funny, enlightening and humbling with insights like:
"You get upset when you hear on TV that the government is running a deficit. It doesn't bother you that you heard this on a TV you bought on a credit card in a home you purchased with a no-money-down mortgage."
He concludes with the most salient point:
"You nodded along to all 77 of these points without realizing I'm talking about you. That goes for me, too."
Have a great weekend.