Investors are ditching active managers and hedge funds in droves opting for index-oriented passive strategies. Those flows seem to be largely offsetting one another. The only net buyers of stocks are companies themselves who are diligently trying to maintain the EPS growth façade as revenues flat line or worse. Even those corporate buybacks are slowing in recent months as credit protection measures reach concerning levels.
Markets once again find themselves going through one of those inane Fed tightening fire drills that have become so familiar in recent years. Of course, 1% down days for the indices used to be standard operating procedure, but now strangely qualify as a cause for alarm by the talking heads. Even as growth expectations are being dialed down once again, Fed rhetoric about the wonders of the economy has put markets on edge a bit. You didn’t expect the FOMC to sound concerned right before we head to the polls did you? Never mind that Ford is cutting auto production as auto sales slow or that rail traffic is down 7% year-to-date.
Stocks have been a tad softer, the dollar is rallying, and bonds are falling on the thought that in December the Fed will finally nudge rates higher again. However, a stronger greenback brings the pain of the dollar shortage to the surface once again in Europe and Asia. Simply put, the Fed has so little room to maneuver as central banker to world. It has boxed itself in. Way too many non-U.S. entities borrowed dollars by the ton during our crazy QE days and paying the money back is proving to be much more expensive for them than they had expected. The danger of tightening with growth so slow and European banks melting down is obvious. This year started on a volatile note precisely because of the same sort of dollar scarcity panic after the Fed tightened in late 2015.
We do marvel at the chorus of ridiculous calls for more fiscal stimulus when our government’s debt has doubled to about $20 trillion in roughly ten years. Of course, deficit spending has already picked up in intensity in recent months heading into the November election. Add to that fiscal irresponsibility the recent central bank babbling about “running the economy hotter” to overcome longer term structural issues. It seems to be the laughable latest foray into central planner propaganda. This is part of their mind-bending explanations on why policy might need to remain accommodative. We do wonder what would happen if they tried to run things “cooler.” After all, we have now seen GDP growth estimates in the U.S. for the current quarter fall from over 3% to something below 2%.
GDP for this year is looking painfully close to only1.5% in spite of triple seasonably adjusting data and throwing intangibles into the calculation in recent years. We guess by some sort of magic the Fed can somehow manage to tighten in December and “run the economy hotter” at the same time. It is an incoherent concept. But I guess that is what we pay them for! It seems that the Fed is not really “running” anything other than a “spin machine” as it tries to coax the yield curve steeper like its counterparts at the ECB and the BOJ have been doing. They are all trying to help the banks facing major net interest margin pain.
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