Topsy turvy again! It was widely predicted that today was the day most likely for Bernanke to announce long-awaited plans to begin “tapering” the $85 billion of monthly bond buying stimulus [i]. But, no. Apparently the economy is more worrisome than Ben expected when he all but declared tapering would be announced at the September meeting. Tapering is delayed, forecasts are lowered; stock market climbs to new highs. Things are so bad (in the economy), they’re good (on Wall St.) Does this make sense?*
[i] “See, “The Great Taper-Caper”.
*Of course, I understand all-too-well why this is happening, but it’s still topsy turvy and rather insane…
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Yes, it makes sense. The state of the economy is already known, and priced into stock prices. The new information is how Bernanke decided to respond to the weak recovery.
Ben (any relation to Bernanke?) I don’t think current stock prices reflect the state of the economy, that’s the problem. If stocks are artificially inflated then, many think, things will plummet if and when tapering comes. Peter Schiff says QE (whatever number they’re up to) is like a monetary roach motel: you can go in, but can’t get out.
http://www.economicpolicyjournal.com/2013/09/peter-schiff-taper-that-wasnt.html
“the Fed has checked into a monetary Roach Motel. Getting out will be infinitely harder than getting in. In fact it will be likely impossible to get out without tipping the country back into recession.
…But the reality is that the economy will never regain true health as long as the stimulus is being delivered.”
No relation to Bernanke. 🙂
I think that stock prices do reflect the state of the economy, but they are also affected by the interest rates offered on bonds.
It is essentially about supply and demand of investment opportunities; stocks and bonds are substitutes, and if bonds are very unattractive investments, then stocks are relatively more attractive.
If you have money to save, you have to put it someplace; sitting on cash or hoarding gold are not reasonable options for e.g. pension funds. If you expect the economy (measured in terms of corporate profits) to do poorly, stocks are relatively less attractive. On the other hand, if the return you can expect from bonds is very poor, then stocks are relatively more attractive. Right now, corporate profits are fairly healthy even though unemployment is uncomfortably high, and even extraordinary stupidity from congress hasn’t totally derailed the recovery. Plus, bonds currently make terrible investments, so stocks are quite reasonably also expensive.
Of course, if monetary policy shifts toward increasing the interest rates on bonds, then stock prices will adjust downwards, since bonds will become relatively more attractive investments.
I don’t pay much attention to Peter Schiff:
There are much better sources for information; Bill McBride at Calculated Risk has a model of the economy that seems to work:
http://www.calculatedriskblog.com/2013/09/a-few-comments-on-bernanke-press.html
Ben: I never put a video in a comment, good to know it can be done. This is pretty good (only heard part of it)–he wasn’t far off in 09, although the Zimbabwe prediction is rather dire.I only have stocks, no bonds,and my feeling/suspicion is that this market is make-believe. That doesn’t prevent one from taking advantage of it while it lasts…
“Apparently the economy is more worrisome than Ben expected when he all but declared tapering would be announced at the September meeting.”
This deferral of the taper has little to do with the Fed’s assessment of the economy, good or bad; it’s a recognition on the part of the Fed that markets regard the Fed’s actions on QE as “forward guidance”, i.e., information about the future path of interest rates — even in the face of the Fed’s officially announced stance that it is nothing of the sort.
I don’t really see how you can disentangle the two. But your up in Canada…
http://www.forbes.com/sites/mikepatton/2013/09/19/the-effect-of-fed-tapering-on-the-economy-the-housing-market-and-stocks/
Mayo: I worked at the Canadian equivalent of the Fed on contract for 5 months; I got to sit in on a lot of research and policy presentations, so now I know just enough about central banking to be dangerous.
Well you do appear to mingle with a dangerous crowd, Carlos.
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