The S&P500 slipped about 0.3% last week on light volume. Volatility, one the other hand, rose slightly; but it still hovers near multi-year lows, suggesting that the equity markets are very complacent.
Interestingly, as the edge of the US “fiscal cliff” draws near, the markets are yawning, almost taking for granted that a solution will be found and that no damage to the economy will come about—from either falling over the fiscal cliff or from any compromise solutions that would nevertheless reduce fiscal stimulus.
For now, we’re watching a “What, me worry?” market. We’ll know in a couple of weeks if the complacency was warranted.
Meanwhile, recent US economic data is still struggling to get better. International trade was worse than expected. Small business confidence is plunging. Retail sales disappointed. Inflation, at least according to the officially published figures, remains mild, and it truly is for all folks who don’t drive cars or eat food. Industrial production jumped, but unfortunately almost all of the increase came from auto manufacturers who are merely stuffing their dealer lots with inventory, rather than selling cars to end users.
Technically, the uptrend on the daily charts is still in tact. But the downtrend on the weekly charts is also still in tact. Breath is mixed. The McClellan Oscillator weakened substantially last week. On the other hand the percent of stocks above the 50 day and 150 day moving averages rose.
Last week, we profiled the concerns of the BIS, the central bank to the central banks of the world. This week, the WSJ published an interview with the former head of the Polish central bank, Leszek Balcerowicz whose monetary policies in the mid-2000’s helped Poland avoid a credit bubble and the bust that hit most of the world.
As the WSJ notes, Poland was the only nation in the EU that avoided a recession in 2009, and has been the fastest growing economy since then.
How did Mr. Balcerowicz pull off such a feat?
Quite simply, he fought the political tendencies to over spend and over print. He forced his nation to strictly limit its scope in the economy and let market forces work themselves out.
What he avoided was a shift to more statism and ultimately stagnation and crisis. He avoided the short-term, feel-good BandAids that “save the day” yet sow the seeds for failure in the long-term.
What does Mr. Balcerowicz think of the Fed and Bernanke’s policies?
In a few words—“unprecedented”, “a complete anathema”, “uncharted waters”. He argues that Bernanke is trapping the US economy in an unvirtuous cycle. But as in Japan, Bernanke’s unconventional measures will fail to spur true organic growth, which means that Bernanke will not be able to stop the monetary easing.
With Bernanke’s perpetual emergency measures, governments avoid fiscal reforms and banks avoid restructuring their bad loans. He argues that this “Fed model” is a form of dangerous form of hubris where a small group of elite central bankers believe that the “know better” than the markets, which is impossible because it assumes that there exists a super-class of people, working for the state, who are smarter than the normal people working in the markets.
And in the not too distant future, we’ll learn if this is true. We’ll discover if the Bernanke led Fed is truly smarter than everyone else in the private sector.
But if it turns out that Bernanke was wrong, then there will be hell to pay….. for the US economy and the rest of the world.