Thursday, October 23, 2014

“Fundamentals”

Economics reporters try to attribute long-term trends to the short-term news cycle in order to cover up the weakness in the system and generate demand for their news products. For example, Reuters tried to pin yesterday’s stock market slide on the shooting in Ottawa:

Market benchmarks began drifting lower in late morning after a gunman fatally wounded a soldier in Ottawa, the Canadian capital, and then entered the country’s parliament buildings, chased by police. By early afternoon, the market had given up earlier gains.

“If markets can connect the dots that this is a wider-ranging concern on domestic terrorism, it’ll put weight on the markets along with global growth,” said John Canally, chief economic and investment strategist for LPL Financial.

“If it’s unrelated to terrorism, markets can probably move on and focus on fundamentals.”

Stocks trended higher 90 minutes after news of the shooting broke, making a weak case for causation. Reuters could just as well have blamed the drop on the Giants winning Game 1 of the World Series the night before. After all, the Royals won Game 2 last night, and markets surged today.

The fundamentals are reflected in erratic swings in stocks on low-volume trading. They’re poor, reliant more on debt and stimulus than productivity and value. Quantitative easing ends this month, and markets tumble as if the floor has dropped out from under them. Fed president James Bullard intimates more QE could be in the offing, and markets swiftly rebound.

Simon Kennedy of Bloomberg sounds optimistic the Federal Reserve will continue to underwrite the fake recovery.

Matt King, global head of credit strategy at Citigroup Inc., and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding.

By estimating that zero stimulus would be consistent with a 10 percent quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.

“Fundamentals.”

With the Fed and counterparts peeling back their net liquidity injections from almost $1 trillion in 2012 toward that magic marker, King’s team said “a negative reaction in markets was long overdue.”

“We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices,” they said in an Oct. 17 report to clients.

Even on Keynes’ flawed demand-side economic theory, stimulus is supposed to be temporary. In opposite world, stimulus is normal.

A shot of adrenaline can be useful for a short time. Running on adrenaline for too long can kill you.

Bank of America Merrill Lynch strategists said in a report today that another 10 percent decline in U.S. stocks might spark speculation of a fourth round of quantitative easing from the Fed. That would mimic how the Fed acted following equity declines of 11 percent in 2010 and 16 percent in 2011.

The good news for investors in the eyes of Citigroup is that although the Fed is still reversing and set to end its bond-buying this month, the European Central Bank and Bank of Japan will more than compensate with more stimulus in coming months.

Well, as long as it’s good for “investors,” who have the disposable income to live comfortably off capital gains, go for it! Meanwhile savers continue to get slammed with low interest rates and an anemic recovery due to wealth stagnating in equities. And they wonder why the bane of inequality has increased under their watch. I’m sure the homebuyer market looked pretty good in war-torn Poland, too.

This is a pump-and-dump scheme, illegal except for when central banks do it. There’s no real value in equities, just the excitement of more stimulus.

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