There is no cavalry coming to the rescue.
That is the takeaway from yesterday’s FOMC meeting. No QE3 was announced, no extraordinary measures were taken, no rabbits were pulled out of any hats. On top of that, the Fed’s language was far blunter than it had previously been discussing deceleration of the economy, possibly risks of an economic slowdown, weak job market, and depressed housing market.
The long-only, fully-invested contingent were hoping for much much more out of the US central bank. They are likely to be disappointed.
I suspect the Fed’s blunt language was telegraphing a message to Congress. Rates are at zero, mortgages are at 60 year lows, and yet demand simply is not there. The Fed has done pretty much all it can do. As we noted yesterday, responding to the weak economy at this point requires fiscal policy, rather than further monetary approach. “The Twist” and purchases of mortgage-backed paper is an attempt to rates down even further. It is hard to see how that can be effective in the current environment.
Don’t expect a policy response from the Austerians. These misguided politicos are in charge in D.C., despite having gotten the past few economic cycles precisely backwards. During the last expansion (2003-07), instead of raising taxes and cutting spending — managing the deficit, creating a better private/government spending ratio — the hypocritical deficit peacocks in the USA did the exact opposite. We cut taxes during (2) wartime, created yet another entitlement program, and raised yet other government spending during private sector economic expansion.
That approach makes much more sense in the current environment of consumer de-leveraging, weak private sector job creation, modest capex investment, and low growth. Instead, we suffer from the opposite:
Based upon a fundamental misunderstanding of the works of John Maynard Keynes, they are once again out of phase. Now, the same crowd is looking at raising taxes and reducing government spending when an already frail economy cannot support it. Hence, the Austerians and a complicit White House are all but guaranteeing a 1937 like recession will be increasingly likely.
Excess government stimulus during expansions and austerity during (or immediately after) contractions is simply misguided economics, bad politics and awful poilicy.
With the Fed out of bullets, traders are now left to their own devices. That means decelerating growth, little in the way of new hiring, and peak profits retreating 15-25%. There is no cavalry coming over the hill, traders are on their own.
Next stop SPX 1100,with 950 as a realistic downside target . . .
This post originally appeared at The Big Picture and is reproduced with permission.