I told you so!
Ben Bernanke?s decision not to taper $85 billion a month of Federal Reserve bond purchases came as a surprise to everyone, but me.
The reasons were legion. Blame Syria, blame the weak August nonfarm payroll, blame a near zero inflation rate, blame the coming debt ceiling crisis. The bottom line is that the numbers are just not there. The economy is growing at just a 2.5% annualized rate at best. A 7.3% unemployment rate isn?t exactly a security blanket. At this point in the economic cycle, nonfarm payrolls should be at 400,000, not well under 200,000. Ben is afraid that if he takes the training wheels off of the economy now, we?ll crash and burn.
The financial markets didn?t need to be told twice what to do. Stocks and commodities soared on the prospect at least six more weeks of maximum monetary stimulus. Bonds rocketed because there is now another $170 billion of government bond buying no one knew was coming. The ten year Treasury yield plunged from last week?s 3% high to only 2.70%.
Gold (GLD) and silver (SLV) finally had a good day because their yield disadvantage has been placed on a back burner. The barbarous relic screamed $55 to the upside. Oil (USO) was strong. Now that Syrian hostilities have been displaced by diplomatic initiatives, the focus is on renewed economic growth. If any of this sounds contradictory, you?d be right. Every trading market is seeing what it wants to see.
The dollar crashed against the euro (FXE), the Aussie (FXA), and the British pound (FXB), since an anticipated yield advantage for the greenback instantly vanished. The yen popped momentarily, but then gave up most of its gains because the fundamental arguments for it to further weaken are so overwhelming.
We did get some useful hints about the future. Although QE didn?t end today, it is unlikely to be still around in a year. The first actual rises in interest rates may not occur until the unemployment rate declines substantially below 6.5%. The Federal Funds rate is projected to be below 2% as far out as through 2016, far below the historical mean. Low interest rates are here to stay, taper or not.
The Fed?s move basically sets in stone my bullish scenario for stocks and other ?RISK ON? assets for the rest of 2013 (click here for My 2013 Stock Market Outlook?). A target for the S&P 500 of 1,780 looks good, and we might well see that figure print on the last trading day of the year.
It also makes the Mad Hedge Fund Trader?s model portfolio for the Trade Alert service look pretty clever. Right now, it is long US stocks, long the Australian dollar (FXA), and short the Japanese yen (FXY), (YCS). Did I mention that we are now up 44% on the year?