To market, to market to buy a fat pig. WRONG. Almost everyone I had seen had with great certainty predicted that the Federal Reserve at the conclusion of their FOMC meeting on Wednesday would announce their bond buying program was coming to an end. It was quite possibly, as the market had touted it, one of the most important FOMC meetings in years, because we were DEFINITELY going to get an announcement on the slow winding down of the Fed bond buying program. It was not a matter of when, but rather a matter of HOW MUCH. And guess what, nothing happened. Ironically in anticipation of the unwinding of these programs, interest rates had started to tick higher. And the knock on impact to housing was just starting to be felt by the housing market, which of course is key to the recovery.
AND, the Fed also suggested that the original timelines given are likely to be extended. Mr. Market was caught completely by surprise and sideswiped, there must have been some scrambling on both sides of the spectrum, I saw Bill Gross in the aftermath grinning and suggesting that the Pimco funds were doing really well, to which he was almost ejected by the producers. But hey, excuse him for being that way, they have been under pressure, you would think.
But more importantly than Bill Gross and Pimco, the world's largest bond fund, what were the reasons given by the Fed for not tapering, and for not signalling that the end of the bond buying program was now? Well, you can read the reasons yourself, so wonderful is modern technology. This thing called the internet, it was not available commercially twenty years ago. Ok, early adopters had emerged, but you know what I mean. Here goes: Release Date: September 18, 2013.
I guess the key reasons, as far as I read into the press conference and the post release delivery by Ben "the measured" Bernanke, are as follows, the bold stresses are done by myself, for emphasis of course:
"Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth."
So rising rates have had their impact on the housing market, but, as you can see below the impact on corporate America and by extension the labour market in the US is the same. Higher rates are not good for now, even if historically they are low.
"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."
So when then will the Fed change their mind? If not now, then when? Well, they want to see the unemployment rate below six and a half percent, they want to make sure that inflation is no more than 50 basis points above their 2 percent target and they need to be sure that long term inflation expectations are "well anchored". No currents or tides pulling them in the wrong direction, either deflationary or inflationary. Lastly, and I think this makes it pretty clear that the FOMC are flexible, the Fed will watch the data and make their next moves based on the incoming and up to the minute releases.
"In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
The upshot of everyone getting it completely wrong, let us be frank and honest here, was treasury yields falling and equities flying, whilst commodities caught a serious bid. And the Dollar got trashed, which meant that emerging market currencies in particular caught a serious bid. Equity markets soared, the Dow and S&P 500 reached new all time highs. Gold (the price thereof) surged 4 percent plus, and this morning the Rand is quoted at 9.57 to the US Dollar. Wow. So this will have an impact this morning.
I saw the Goldman Sachs CEO Lloyd Blankfein on the box, in part talking about continuing to help SAC Capital and the embattled Stephen Cohen trade (through their firm, Goldman) and in part talking about the financial crisis and the inclusion of Goldman in the Dow Jones Industrial average. He was actually quite jovial, and why not, five years on from being the whipping boys, his company that he has presided over (with much criticism) has managed to stand to see themselves included into what is possibly the most exclusive (if not quite clearly understandable) index in the world. Yes, from villains to heroes in such a a short period of time. 5 years is a pretty short time, all things considered. But Blankfein said something interesting, he said that the US economy was in far better shape than many thought and he thought that the taper anxiety was completely unfounded. Hear, hear! A rare interview with the man that is secret, but clearly you can see that he is an absolute genius.
Slightly before that interview, sitting in the same seats and being questioned by the same anchor (Andrew Ross-Sorkin), Sunny Jim or James Paulson from Wells Capital Management was delighted that the taper was to begin, or of course, so he thought. I share his sentiments, or at the time felt, that is great, Jim (James) is always optimistic, which of course led to his nickname on Wall Street of Sunny Jim. If the economy is that much better than before, then why wait? Really. I suspect that this is not a blunder of any sorts , this is just a step away.
The worst part of all of this is that everyone gets to still be anxious about this event and when it arrives. That part is going to irritate me. In the end it is the company and their earnings that matter the most. The fact that the stock market rallies hard after this non-action now is irrelevant, if not very pleasing for equity investors. The quality of your holdings matters in the end.
Home again, home again, jiggety-jog. Markets are flying. A record high for the exchange this morning, a broad based rally with the gold, platinum and broader resources market leading the charge. We saw an ugly trading update from ABIL yesterday for the full year, we will get into that detail tomorrow when we have a little more time. But for now enjoy the spoils of not expecting.
Sasha Naryshkine
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