Markets Inspired By Fed’s QE3

Last week not only did Europe deliver a ray of hope, but, more importantly, the Federal Reserve indicated a willingness to resume its money printing exercise. Thus, the greenback entered a short-term negative trend and equities celebrated.
But first I would like to point out a few unscientific economic observations. Wasn’t Microsoft’s (MSFT) Bill Gates that once said – and I’m paraphrasing -- that he liked flying coach because that’s where his customers were? Well, sometimes with economics the best approach is to take a step back, throw all the literature and data into a box, and pay attention to the subtle messages around us. One can learn a lot by walking the pavement and getting a feel for what the common person and business is saying and doing.

What I have noticed at supermarkets is that the basic goods have risen in price, and, as an example, bread is one of them, while wheat futures dropped 30% since February. In addition, a constant flow of specials and discounts highlights how difficult it is to sell the less basic items. The pricing power only exists where the customer doesn’t have a choice, and speaks volumes about the underlying economic strength.
Credit card commercials are now focused on all sorts of bonus programs, and increasingly offering cash back -- a feature that was unique to the Discover card -- seeking that elusive spender that has become a rare commodity. Lastly, the “layaway” comeback highlights the aversion to debt, or the inability to obtain credit, and is yet another old tactic to entice the consumer into the stores. Economically speaking, weakness is everywhere, and last week was replete with speeches delivered by several Federal Reserve members. I’ll start with Sandra Pianalto, the President of the Cleveland Fed, as reported by MarketWatch.

    "My outlook for real GDP growth in 2012 is about 2.5%, on par with the past two years," Pianalto said in a speech at the University of Toledo. The primary cause of the stubbornly high unemployment rate is that spending by consumers, businesses and government remains "uninspiring," Pianalto said.

I think she’s very optimistic, but the surprising portion of the statement is the bundling of government with the other two types, and if she feels that government spending is “uninspiring,” maybe she should take a guided tour of the Treasury department’s balance sheet.Minneapolis Fed President Narayana Kocherlakota also offered his opinion, according to Reuters, although there’s no reliable way to determine the validity of his claim.

    U.S. unemployment is "disturbingly high," but it would be even higher had the Federal Reserve not undertaken a series of unprecedented steps to ease monetary policy, a top Fed official said on Thursday.

Then the talk about more Fed stimulus started to pick up steam, and Federal Reserve Board Gov. Daniel Tarullo gave us a glimpse when he said that another “large-scale purchase program of agency-backed, mortgage-backed securities to support the economy” would be considered, as reported by MarketWatch, which the stock market liked a lot.

    In a speech at Columbia University in New York, Tarullo said that the purchases could help the housing market, which is "central to the slow pace of the recovery."

Without a doubt, the two central themes were housing and unemployment, and the former continues to hinder the economic engine from moving forward.

Janet Yellen, The Federal Reserve’s Vice-Chair, also opined and stated that “we are prepared to employ our tools as appropriate to foster a stronger economic recovery in a context of price stability," as reported by Reuters. But price stability in this context was not “inflation,” the preferred Fed topic.

    She said bond markets were again hinting at a rising risk of deflation -- the threat that prompted the Fed's second round of bond buys last year.

Finally, and as reported by MarketWatch, further easing is being considered – and the stock market liked it a lot.

    The Federal Reserve will try to give greater guidance to markets about its low interest rate policy at its November meeting while keeping more quantitative easing in its back pocket for use if the economy starts to weaken, analysts said Friday after a wave of central-bank speeches this week.

And that was the story for last week, and although the stock market found a new path North and defied the hard core, yet correct calls for a weak economy, the economic landscape will not change an iota. But as I’ve stated before, stock markets and economics don’t mix, and move at different speeds, while flexibility and an open mind will go a long way toward achieving investment success.

Even if one sees the Fed speeches as a deliberate "put," swimming against the current is detrimental to one's financial health.