We have heard so many earnings warnings in the last few weeks that we have lost count, but FedEx, Intel, Nike, and Norfolk Southern are representative of the sorts of bellwethers that have been indicating trouble ahead. Chinese equities continue to sit near 2009 lows, suggesting that that nation will not likely be the engine of growth it has been for the last few years. The more we read, the more clear it becomes that China has a tremendous bad loan problem as well. In Europe, the world awaits a decision by Spain to accept a bailout package which would require it to give up a good deal of its sovereignty. Rioting in Madrid and Athens has reared its ugly head again over austerity measures put in place to stem the fiscal bleeding. Global manufacturing indicators continue to point to recession.
In our view, markets rally in the face of already rich valuations and in the face of this bad news simply because the Fed has embarked on additional quantitative easing (QE), creating a sugar high for short-term traders with some indices up in the neighborhood of fifteen percent. In contrast, transportation stocks have gone nowhere this year; an anomaly that seems to suggest that QE hype does not treat all stocks equally. Transportation stocks are often an important leading indicator of future growth prospects, so either industrial America is headed for a major slowdown or an unusual decoupling will occur.
We cannot emphasize enough how much distortion has been created by the Fed which has knowingly tried to force investors into one of the riskiest market scenarios we have witnessed. Zero rate policy has caused investors to take more risk when they should be taking less; pushing volatility to low levels in spite of the most uncertain market environment we can imagine.
Yesterday’s comments from Chairman Bernanke have clarified the view that the Fed knows it is taking money from savers for its grand experiment, but few on Wall Street mention the negative effect of that on consumer spending. Also, gas prices in the U.S. reside at record levels partly because of speculative commodity activity directly resulting from QE3 and its predecessors. Obviously, that is another enormous burden on consumer spending and business cost structures. Again, we do not see that jiving with the conventional wisdom that QE is good for equities espoused by the same pundits who led many to slaughter in past Fed easing cycles.
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