1. Change in statement:
a. Previous: “The committee continues to see downside risks to the economic outlook.”
b. Today’s statement: “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”
2. Key Bernanke sound bites relating to tapering of QE:
c. “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,”
d. “And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”
e. “If you draw the conclusion that I just said that our policies -- that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy. If the economy does not improve along the lines that we expect, we will provide additional support.”
I wanted to share some of our Chief Investment Officer's comments regarding the current market reaction to the above:
After yesterday's press conference from Mr. Bernanke it is clear that the market is back in risk-off mode but we ask the question why are all asset classes moving in the same direction and on the surface the only safe place to be looks like cash????
Mr. Bernanke signaled that should the economy continue to improve then the Federal Reserve will start to taper the Quantitative Easing that we have seen over the past few years or in other words they would slowdown their $85 billion per month bond buying and eventually end the buying sometime by mid-2014. This potential tapering has been talked about since Mr. Bernanke mentioned it at the Senate and Congressional hearings in late May and the markets have seen a pull back since that meeting especially when we look at 10 yr bonds in the US. With his confirmation of such at yesterday's press conference the markets have continued their risk-off activity. However, we ask the question if the economy is improving why are the stock markets declining rapidly???
As we are all aware the High Frequency Traders control the markets these days and with stocks in a selling phase these High Frequency players exaggerate the problem. So why the sell-off at all?? Well it's called the carry trade and for those of you that have been around long enough I am sure you will remember the great unwind of the Yen carry trade. Basically Investors borrow money at low interest rates and buy stocks, as interest increase the cost of the carry increases and therefore investors are forced to sell stocks and payback the loans. We expect this unwind to continue for the next few days!!!!!
So what is going to happen over the next few months?? Volatility and lots of it!!! What Mr. Bernanke has done here is increase the odds of extreme volatility around economic releases as he clearly noted tapering will be data dependent. We expect that the market is going to be thrown around on a regular basis here as Housing and Employment numbers are improving yet Manufacturing and overall Growth remain subdued. -SJ.
This correction was an overdue and welcome event in my opinion. We've been watching the margin levels of investors continuously increase over the last year, mostly on the back of continued QE... The forced covering will bring asset prices back to more normalized levels, and the potential for long-term fundamental investing can resume.
Hold firm to your disciplines. Be proactive, not reactive. Conviction is key.
Regards.
E
"Since WW2, investors have endured a total of 56 pullbacks, 19 corrections and 12 Bear Markets." (S&P Capital)
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