Ben Bernanke delivered exactly what I expected today, continuing his massively simulative monetary policy as is. The taper went missing in action, and search parties have been already sent out by the bears.
In the past this move would have triggered a massive move up in risk assets, and a collapse of the bond market, but not this time. Bernanke’s news is not exactly new, and leaving things unchanged doesn’t exactly prompt frenetic bouts of volatility. We are also in the summer doldrums, with much of the market liquidity now competing in company golf tournaments, gorging at clambakes, or topping up tans at the beach.
What this sets up is a rather dreary season of trading inside narrow ranges. The S&P 500 (SPY) will bounce along like a ping pong ball between 1,580 and $1,680, the ten year Treasury bond (TLT), (TBT) within 1.90%-2.40%, the yen (FXY), (YCS) inside ¥98-¥104, and gold (GLD) trapped inside $1,250-$1,480.
You can trade outside of these ranges with alternating call and put spreads and take in some modest returns. Or you can conclude that the risk/reward is mediocre at best, and join you friends on vacation. You don’t fool me. When I send out my newsletter these days, those “Out of Office” messages are breaking out like sunburns at Coney Island, Navy Pier, and the Santa Cruz Boardwalk.
I think the markets are reserving their real fireworks for us in the coming fall. If the Federal Reserve’s economic forecast is correct, we are headed towards a 2015 GDP growth rate of 2.9%-3.6%, an unemployment rate of 5.2%, and an inflation rate on only 1.6%-2.0%. That is a best case, “golden age” type scenario for the financial markets which leaves the Great Recession well in the dust of the rear view mirror.
The “Big Tell” here is the Fed’s inflationary expectations rate. They are close to nil. The august government agency thinks that even a return to the long term average US economic growth rate above 3% won’t ignite a wildfire of price hikes. That greenlights a continued pedal to the metal on monetary stimulus, and highlights the unemployment rate as the top priority.
These predictions would give us the launching pad for risk assets to commence a nice yearend rally. That would take the S&P 500 to $1,750, bond yield to $2.50%, the yen to ¥110, and gold down to $1,100, much to the chagrin of gold bugs everywhere.
What was the biggest move today? My short position in the Japanese yen, which plunged a full 2% as Bernanke spoke. Sometimes fairy tales come true after all.