Let’s take a look at what all the excitement is about in the bond market and how the market thought they heard Chairman Ben Bernanke say something that he said he didn’t really say. If you’ve been following the financial news in the last week, you know that Mr. Market thought it heard Mr. Bernanke say that he might consider slowing down QE3 a bit earlier than his 2015 target IF the economic data justified those actions. Well Mr. Market heard everything Chairman Bernanke said EXCEPT the IF part. Shortly after the comments were made, the bond market sold off sharply over the fear that if big daddy pulls out the needle and slows down or even stops buying $85 billion of bonds from the market per month, that prices would fall and interest rates would rise, which is exactly what will happen.
So, let’s take a step back for a moment and first off, look at the real numbers and the promises that the Fed Chairman has consistently repeated countless times. The latest attempt to stimulate the most stimulus resistant economy America has ever seen (including the great depression) is referred to as QE3 and was aptly renamed on this show as QEternity, because it had no dollar limit and no official end date.
Now, as true as that may be, what QEternity did have was quantitative measurements of the economy that would determine whether or not the stimulus would slow down or end.
These quantitative measurements were unemployment needed to drop to 6.5% and our economy needed to start growing at an annual rate of 2.5%. Seems pretty clear to me but somehow, while someone was dissecting Mr. Bernanke’s sentences during the Fed meeting, it was interpreted that all bets are off and stimulus is ready to end. So, regardless of why that happened or what might have been said to confuse or mislead the markets, let’s see if the reality of ending QEternity is viable any time soon.
We’re now about 4 years into the “recovery” and we have record unemployment of 7.6% and GDP growth of 1.4%. Now when I say “record unemployment” I’m not just trying to be dramatic to entertain you (although I have been known to do that), the fact is that never before in the history of the United States Of America have we been 4+ years into a recovery and had 7.6% unemployment. Never. And never before have we printed and thrown this much money at a problem with barely any results. And please don’t point to the real estate market over the last year as some kind of proof that the governments plan is working. Remember, we had super low rates for over 4 years, and real estate did nothing and its movement in the last year has little to do with rates. But we don’t have time to talk real estate today, because that’s another fascinating show in itself. So, back to unemployment at 7.6%. From the beginning of QETernity, the target to back off the stimulus was 6.5% unemployment. We are miles away from that number.
OK so how about the growth of our nation? The true measurement of the strength of our economy is known as the GDP. The target for that one is to grow the economy at an annualized rate of 2.5%, in order to back off the stimulus. Last month our annualized growth rate in America was a barely alive 1%, and for the entire quarter, the annualized grow rate of our great nation was 1.4%…a far cry from 2.5%.
So here is my take on all of this noise. The numbers are what they are, and with record high unemployment of 7.6% (5 trillion later) and an economy that is barely growing at about 1.4%, we are nowhere near what we need to slow down the spigot of government money, according to Chairman Bernanke.
So having said all of that, it’s my guess that bonds will have a nice rebound over the summer, driving yields back down and prices back up. I could be wrong, and it wouldn’t be the first time, but that’s what makes sense to me. As for stocks, the stage is set for a big correction, so be conservative.
Image is from Wikipedia Commons: Government, Mural by Elihu Vedde