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June 26, 2013
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Yesterday I wrote that for all the talk about tapering by the Fed, I just wasn’t quite buying it. Lo and behold, the Gross Domestic Product (GDP) report came out this morning and was much worse than expected. The markets seem to rally on the news. Why? Read below:

The Fed Gets a New Reason to Keep Stimulating

The Federal Reserve chairman has rattled investors recently by suggesting the Fed could curtail its easy-money policies later this year as the economy gets stronger. Problem is, the economy isn’t getting stronger. Not yet, anyway. In fact, it’s weaker than we thought.

Economic growth in the first quarter, it turns out, was just 1.8%. The government’s earlier estimate was 2.4% growth. Revisions in economic data are common, but that’s a large and surprising drop. And it comes at a particularly sensitive time for financial markets, when changes in the real economy are likely to directly influence Fed policies that determine the direction of stock and bond prices.

The new GDP estimate for the first quarter reflects lower consumer spending on services such as travel and healthcare than previously thought. One thing pushing up growth was spending on utilities, which was driven by cold weather and isn’t a sign of an improving economy. A buildup of inventories was another discouraging factor; this means goods are sitting on shelves instead of heading out the door. “These final GDP growth figures spotlight the underlying and ongoing weakness in the consumer sector,” forecasting firm IHS Global Insight advised in an analysis.

It is the old proverbial bad news is good news. Certainly it seems that this idea that justifying more quantitative easing by pointing to bad economic news might be the best way not to face reality, or some tapering, of the Fed’s experiment.

I have mentioned the rapid speed of rising interest rates on this blog on several occasions. There have been a few articles by the mainstream press citing concerns about the rise in mortgage rates affecting the housing market, which is certainly a legitimate concern. However, the thought that keeps going through my pea brain is that the many multitudes of trillions of dollars of interest rate swaps (derivatives) are bound to be triggered. And it seems likely that, in the same way the mortgage crises was a product of the credit default swaps surrounding the mortgage market, maybe we are now in danger of a similar event with suddenly rising interest rates. And it seems possible that once the dominoes begin to fall, we could have some real systemic problems.

Here is the image I have: Ben is digging in a coal mine. He keeps digging deeper and deeper (deeper than anyone has ever dug before — by far), but he has not reinforced any of the walls. The rest of the miners stuck in the hole with Ben see that the walls are starting to crumble. Instead of escaping the mine that is on the verge of a collapse or shoring up the walls, Ben tells his colleagues, “Dig faster and deeper boys, I think we can dig through to the other side!” We are in a mighty deep hole thanks to the Fed’s policy and Wall Street’s malfeasance, but we are not about to arrive in China if we dig deeper!

Ben as Miner

One Comment
  1. Wayne permalink
    June 27, 2013 9:46 am

    Hi Jon,

    Uncharted Waters:

    I think Bernanke has sailed the economy into uncharted waters and as any experienced seafarer will tell you, when in uncharted waters, don’t speed up, but slow down or stop. Oceans around the world are littered with the remains of vessels that, unfortunately for the crew, the captain failed to heed this age old warning.

    As with ships navigating uncharted seas, economies too have the potential to become grounded or worse sink when navigating uncharted economic waters. There are many ice bergs, sand bars and reefs to be avoided when traveling unknown seas. So when venturing into uncharted waters a captain should exercise caution and prudence to avoid all the potential risks awaiting him and his crew.

    Unfortunately for the economy, our captain continues to speed-up (more QE). It is possible that Bernanke can sail us through this dark passage without a scratch on our economic hull. This, however, is unlikely given all the potential dangers lurking just beneath the surface.

    As we witnessed last week, one mention of reducing the speed (QE) of our economic ship through us completely off course. We begin to see many hazards (10 yr. bond 2.62%) breaking lose from the sea floor and floating dangerously close to the surface. It was a close call but, from what I see today it appears that Bernanke has temporarily righted our course with some quiet bond buying. If he continues this course we will sail deeper and deeper into uncharted waters.

    I see two possibilities: First, chart a known course. We will experience a few storms along the way and take on some water, but it is unlikely the ship will sink. Or, second, we can stay the present course and hope for the best. This option will continue to keep us in uncharted waters and brings with it many “unknowns” that may not surface for many years. “Unknowns” tend to be create fear at sea and in markets. By staying on this uncharted course we travel further into the dark cold water that lays ahead without benefiting from the experience of past navigators. And sailing blind with out the benefit of historical charts and graphs can be a risky business at sea (and economies), regardless of the captains experience.

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