The Federal Reserve's decision last week to add a little more shake to Operation Twist isn't going to unstick anyone's economy, writes Bryan Perry of Cash Machine.
Sometimes I wish my prognostications wouldn't actually pan out.
At the conclusion of a two-day meeting of the Federal Open Market Committee last week, the best solution the Fed could come up with was the simple extension of Operation Twist through 2012. In this policy, the Fed will simply shuffle the maturities of some of its holdings to shorten up maturities of Treasuries it holds, with the added intention of keeping downward pressure on interest rates.
I got news for you, Bernanke: The decelerating growth rate of the US economy is already taking care of that.
At this point, Operation Twist has almost no bearing on stimulating the economy, and the sector profile section in the June issue of Cash Machine highlighting Fed stimulus spelled this out in detail. They're essentially out of any further means of effective measures that can jolt economic growth. In essence, they're done.
The attention now turns to Congress, where some real upside catalysts do exist, and the Fed chairman was quick to acknowledge that. But, at the same time, he wasn't shy about warning against the rapid economic slowing if the fiscal cliff scenario isn't addressed before the November elections.
Some kind of "grand bargain" of pro-business agenda tied to spending cuts and a balanced budget, or anything that resembles this, would be the quintessential turning point for the bulls. But that's pie-in-the-sky at this point.
In an on-air interview this week, Alan Simpson, the Republican senator who co-authored the Simpson-Bowles blueprint for getting the US fiscal house in order, explained that the only real solution in the short term is for Congress to agree to disagree and to push out fiscal-cliff issues—expiring tax cuts, automated spending cuts, and capping the debt ceiling—until spring 2013. As bad as that can-kicking solution may sound, markets here and abroad would applaud the move and trade higher for the balance of the year.
As for this week's investing landscape, the economic data being released shows further deceleration, as confirmed by the Fed chair yesterday. Bernanke ratcheted down the Fed's forecast of US GDP growth by 50 basis points, to between 1.9% and 2.4%.
Meanwhile, he also said that the unemployment rate would stay above 8% for the rest of 2012. Last week's initial jobless claims report of 387,000, versus the 380,000 consensus, underscores this trend in the labor markets, and shows an economy that isn't growing jobs, plain and simple.
Bond yields continue to hover at historic lows, but levels of bank lending continue to be depressed because of lenders' aversion to risk from prospective borrowers. From the most recent Fed Beige Book data, some evidence of easier credit is beginning to emerge—and not a moment too soon.
Consumer sentiment also is tracking lower, even as gasoline prices are back down below $3.35 per gallon on a national basis. Chalk it up to uncertainty, which is the culprit for spending being reined in. I can't blame folks for watching their purchasing power when there are so many unanswered parts to the economic puzzle.
The one major positive takeaway this week is that Spanish bonds have staged a sharp rally, with the ten-year yield back down to 6.63% as of last night. This time last week, that same yield was 7.28%.
There is a heightened state of awareness that market sense is moving the European Central Bank and its key player, Germany, in the direction of pan-euro deposit insurance and the issuance of Eurobonds. Only time will tell, but post-Greek elections coalition efforts by all parties are showing rapid progress, and a feeling of better coordination about balancing austerity with stimulus is taking hold.
Beyond concerns in Europe and the United States are those coming from the emerging markets, as well as the possibility that a major slowdown in China is in the making. Global investor and emerging market guru Mark Mobius gave a scintillating interview earlier this week in which he said that China won't have a landing of any kind, and that GDP should register right around 7.5%, signaling to the rest of the world that Asia is in relatively good shape.
Both Australia and New Zealand reported strong monthly economic data points that underpin this opinion, and are, I believe, helping support the US equity markets.
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