Words. Nothing more t than a few carefully chosen words, from Ben Bernanke, was all that was needed to power the US stock market—and most other dollar based risk assets–up, up and away. The S&P500 jumped 2.96% after Bernanke simply hinted, at a conference in Boston, that the Fed is not rushing to taper its permanent QE program. So high yield jumped over 3%. Gold spiked over 5%. Oil motored 3% higher. And investment grade bonds also moved up about 1.5%.
In the short term, it’s amazing how much power the words of one man, an un-elected official of a semi-private institution have on the world’s markets. And if you’re a trader, then very few signals are more important than the news coming out of the Federal Reserve. But if you’re an investor, you must not forget that this is the same Federal Reserve that oversaw the onset of the Great Depression, the dot-com tech bubble, and the recent real estate bubble. As powerful as they’re words are in the short-term, those words were not powerful enough to prevent 50-85% losses in the US stock markets during these prior crashes.
Technically, the US stock market, by breaking out to new highs, has re-established an uptrend, both on the daily and the weekly resolutions. In fact, at the daily resolution, the S&P is actually quite over-bought and ripe for a reflexive pullback, even if only a minor one. On the weekly charts, the 200 day moving average was never violated and its slope is still positive. So the technical momentum players will continue to ride the wave.
Off Wall Street, in the real economy on Main Street, the struggle continues. Wholesale trade plunged. Initial jobless claims jumped to 360,000. Producer prices skyrocketed, driven primarily by the surge in oil prices—which are on track to pushing average national gas prices above the dangerous $4.00 a gallon level. Finally, consumer sentiment came in lower than expected.
Several times over the last few years, we’ve quoted Seth Klarman, a very long-time hedge fund manager who runs over $30 billion, making him one of the largest and most successful managers in the industry. In his most recent commentary, as reported by ZeroHedge, he argued that the average American is not fooled by the faux economic recovery, the artificially engineered market bubble, and the dangerous state of the US government’s fiscal condition.
Here are some key quotes:
Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one. They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions.
They regard with skepticism those who don’t accept that we have a debt problem, or insist that inflation will remain under control. Indeed they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.
When an economist tells them that growing the nation’s debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute.
They know that a society’s wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.
We agree Mr. Klarman. We agree.