As mentioned in my last post, it can be very problematic dealing with the increasing plethora of statistics that bombard you through the trading day. We touched on structure around news events and statistics, and now we look at what this all means in the current economic and therefore trading environment.
Unfortunately the current climate is not easy to decipher as the influence of the American stock market continues to dominate nearly all asset classes. There remain two major counter forces. The first is the perception that major company profits announced this week have been beyond analyst’s estimates. I think it’s worth pointing out that it is in the market participants’ interest to underestimate in order to provide a positive spin. The results season is nearly always positive in the short term, but until the market has received all the information, it can rarely trend. It is also important to remember that banks generally make profits at the expense of everyone else, and moving forward, the new finance bill will erode their ability to generate derivative trading profits to the same degree.
Adding to the inability to find direction is the string of economic statistics that show the U.S. slowing down quickly, whilst Germany in particular garners some benefit of the weakened Euro via an increase in manufacturing. Finally, we had Mr. Bernanke’s biannual testimony, in which I felt he was extremely downbeat on his assessment looking ahead, and most worryingly, gave no specifics about how they would tackle problems if they occurred in the future.
The reality is that the Fed is largely boxed into a corner as rates at the short end and for providing liquidity to banks are already at rock bottom. However for corporates and individuals in the mortgage market, rates remain stubbornly high and the evidence that the recent slide in yields has had no impact on mortgage applications suggests that borrowing costs are still too high. When rates are perceived to be at rock bottom, it appears that all the risk is to the upside, which stifles commitment, entrepreneurial spirit and therefore growth.
The solution is relatively simple, but he shows no signs of considering it. The Fed needs to cap long term rates at a much lower yield than what they are now. A ceiling of 1.5% on 30 year money would in all probability lead to rate moving even lower as demand for any yield would still exist. If businesses and individuals know there is a ceiling it removes the fear, and allows for stabilization in asset prices and an environment for growth. The more proactive this is, instead of waiting for a fresh crisis to develop, the more positive the impact. Unfortunately from Mr. Bernanke’s comments this week, it appears a crisis will have to occur before this policy could even be contemplated. In a jobless recovery, stagnant wage growth and falling asset prices, the risks to that happening are increasing.
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