THE BAZOOKA EFFECT AND THE BERNANKE PUT
It should be no surprise to anyone reading these comments that one of the primary keys to understanding market direction in recent years has been understanding when policy intervention would occur. The market has been like a sobbing baby who goes through fits and starts swinging from a position of euphoria, to concern, to full blown weeping at the feet of policymakers. And the market has tended to get what it wants in recent years. The market collapses on fears of policy failure or economic decline. Policy makers become concerned they’re behind the curve. Then the initial threat of policy intervention halts the market downturn and the actual intervention calms nerves for a while. Things settle back into place, the economy looks to be settling and then boom, the Euro crisis (or some other exogenous shock) hits. Rinse wash repeat.
In a note this morning Goldman Sachs touched on this phenomenon:
“Even more important than these in the short term, we think that after two months of negative data, bad markets and little policy response, the pendulum is likely to swing back towards policy intervention. In the US, we continue to expect some fresh easing moves at the June 20 FOMC, and recent remarks by Fed officials (including Janet Yellen last night) have taken a more dovish tone. In Europe, we may see announcements of funding aid for Spanish banking recapitalization. More proposals, and atmospherics, on deeper institutional arrangements – deposit insurance, fiscal risk-sharing and “banking union” – are likely as we move towards the June 28-29 Eurogroup summit. And while the Greek election result is likely to begin a messy negotiation process, the market already expects that and we have argued that concerns about an imminent exit – which gripped the market a week or two ago – are overblown. China’s easing process has taken another step forward too, with this morning’s rate cut. Beyond these areas, hints of Japanese FX intervention or of shifts back towards QE in the UK have more plausibility than they did a couple of months ago. Even if these moves ultimately have limited effectiveness, we think markets could easily continue yesterday’s move higher if policy activism increases. On that basis, Thomas Stolper and team cut a controversial but successful short in USD/JPY that they have recommended since mid-March, while Noah Weisberger and team also cut a more recent short recommendation in US consumer discretionary stocks.”
The important thing is, the market is not the economy. Most investors don’t connect the dots here. They whine about policy and get fixated on the moral perspective of what should and shouldn’t be done (I whine about policy all the time because I think it’s been rotten in recent years). And that’s great from a policymaker or a voter perspective, but it’s USELESS from a market practitioners perspective. Ignore the bazooka effect at your own risk. It’s on the table and central bankers are ready to pick it up.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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29 Comments
Cullen:
You are a smart guy, but you really overrate Bernanke and the Fed and what they can do in this situation. All they can do, is give a temporary bounce to the market and make things worst in the future. You cannot solve a debt problem with more debt…..
You can solve a private debt problem with more public debt. That is exactly what the US is in the process of doing.
You’re making the precise mistake I discuss in the piece. QE, Bernanke, the ECB – they can all cause the market to spike in the short-term. It doesn’t mean it will have any economic effect or that it will solve our problems, but from a market practitioners perspective, you can’t confuse the two.
All these people being bearish because they don’t think the policies will work are totally failing to understand market dynamics.
Agreed – market bottoms when previous stimulus ends which is always where the new stimulus begins.
Your analysis couldn’t be more precise – rinse, wash, repeat.
Mr. P: From GS’s advisory: “Even if these moves ultimately have limited effectiveness, we think markets could easily continue yesterday’s move higher if policy activism increases”.
There it is in a nutshell. Until such time that we get a change in political and/or central bank leadership, the kick the can down the road game will continue. It’s futile. But there it is.
Things are not what they are. They are what they seem to be (Santayana). People latch onto whatever might confirm their hopes. If it doesn’t satisfy its ignored.
I’m positioned right now for the reason they will have to use the bazooka. Our work is so good we can make calls that force these dicks to use bazooks. But I CAN’T help my son pay for college or my wife get her nails done(my wife is Korean and when I walk into the nail salon I can’t tell if she’s working or getting her nails done) by fighting bazookas.
If they come out with this stuff..you can question it in the context of how much it will push risk assets up from here. But you must be flexible. Your job is to make money. We DO not fight the Fed.
The SPX is fairly valued here. Where does the SPX sell? Globally. What is occuring in Europe and Asia? a slow down. What does a stronger dollar do for us?
Look what GS is saying. There entire thesis is that things suck so bad we’ve cried loud enough we get more of what has not worked. They are recommending and conjecturing based on Policy meeting dates to invest your money in risk assets. They get paid to tell you things suck..and then go online and look to see when Daddy is coming home with his wallet. Does one need to go to an Ivy league school to tell the Muppets how they arrived at this investment recomendation.
Guys I don’t have the answers to how silly this has all become. Bazookas, Helicopters, Meetings, G7 secret calls, auditors presenting Spains needs, Grexit, Fed Doves…it’s all hilarious.
We are positioned exactly as we should be given GS is hoping for Bens Teet. If he pulls it out I will punch GS in the face and put my clients money right on that Teet. They will suck all the Bazooka Milk out of it. And we will do this all over again come Oct. Maybe March of 2013.
Be flexible and if your allergic to Milk as I am. You’ll have to let your stomach get used to it. Don’t wast an opportunity to suck on some titty.
the feds been accommodative for over a decade now. hows the market done?
and the fed was very accommodative months if not years before the market bottomed in 2009. fed accommodation is hardly a market timing tool.
Folks – the ONLY path out of this mess is for the US Congress to begin TRUE deficit spending. By this I mean substantial spending that is not offset by equal sales of US Treasury securities. In other words REAL money printing. Not this QE BS.
Watch the bond market sweat when that day arrives. 1946 – 1982 was not a fun time to own bonds, current bond bull is now 30 years old. Deflation is NOT going to be tolerated. Fortunately Federal Representatives stand for election every 24 months. Only Congress can fix this and if they don’t – their replacements will.
Today’s debts will either be inflated away or written off.
Of course they will try about a hundred other things first.
Existential struggles for survival (like WW 2) are the things that enable and justify the kind of unlimited Federal spending you are talking about. That is what happened last time.
I’ve been expecting more QE for a while. I think June 20 is a likely timeframe for the fresh round, as the Greek election will likely give the excuse.
On the other hand I’m a little skeptical as well since I think it will be hard to justify QE through the election, part of me expects the QE to be announced at a time more convenient to help the president win the election.
Romney has already promised not to reappoint Bernanke under any circumstances whatsoever. Bernanke has nothing to lose by engineering the Mother of All QE in October. He could buy 5 trillion worth of MBS in one fell swoop. I could even see him get on a stage with Obama and announce the Reelection Refinance Plan to refinance all mortgage debtors at close to 0%. The Bernank wants to stay in power, and he will do whatever it takes.
It’s even simpler. Since (at least), the birth of fiat money, understanding the major money actors in their markets has always lead the economy, not the other way around. Macro investing is about understanding: governments, credit markets and accounting, flows/liquidity. You ignore the lessons taught by TPC in these domains at your own peril. That’s also why the MMT/MMR and other monetary debates, fiscal policy, etc. have been so important; one needs to think about what the government is thinking.
If there is nearly a 50/50 chance that the Fed will ease on June 20, then it would seem to make sense to have nearly 50% of your money, or a substantial amount, in equities, waiting for the Fed to play its card. Of course, there could be a big sell-off the afternoon of June 20 if Ben does not act. Seems like if the Fed doesn’t act June 20, then they will probably be forced to act by the October/November timeframe at the latest.
Cullen,
You are absolutely correct here. The key was to watch for the start of new policy intervention. And market is not the economy (or, at least, not always).
The problem right now is that the knowledge about intervention expectation became the consensus. Both bulls and bears from moderate to perma ones are expecting the next round to start soon. Thus, the question emerges – to what extend this expectation is priced in. Or (which is really the same), what should be the multitude of the next stimulus to move the markets up to the same degree as it happened in the past. Or (which is again the same), should the market go down more in order to respond to the new stimulus of reasonable magnitude to move up to the same degree (counting from the new established bottom) as it happened in the past.
I would greatly appreciate your thoughts on this matter.
Money will be printed. That is inevitable. We have public bills that must be paid (entitlement spending cannot be cut for political reasons) without the tax base to finance such spending. We also have trillions in deleveraging still ahead and that will require papering over.
Short term probably very good for the market, long term probably very bad in ways we can only guess at. Deflation? Inflation? Political crisis in Europe? An oil shock? Political chaos in America?
So it’s the same old thing — lots of wise guys gambling that they can buy now and get out before it falls apart again.
We’re not seeing a Bernanke “Put”, the reverse. Krugman has pointed out that Uncle Sam (Obama), the States, local counties and towns are on track for the lowest increase in fiscal spending in over 60 years. Probably the lowest since the Hoover administration.
KRUGMAN on “This Week”: “Yeah, this is real government spending, so it’s federal, state and local combined, deflated, you know, adjusted for population growth and inflation, and it is plunging. It’s plunging mostly because of cutbacks at the state and local level, because the aid that they were receiving in the stimulus has run out, but also because unemployment benefits have been expiring because Congress won’t — you know, Republicans in Congress won’t extend them.
“So in effect – and, by the way, if you extend that chart backwards, there’s been nothing like this since the demobilization after the Korean War. We’re actually practicing government austerity on a scale that we haven’t seen in 60 years. It’s not the president’s policy. In effect, we’ve already got the policies that Republicans say they will impose if they take the election, and yet, of course, it may lead to the defeat of this president.”
I’d like to see some backing evidence that states are practicing austerity. Until then, I’ll just assume Krugman is making up stuff to advance his narrative.
Here in Michigan, the state’s upcoming budget actually has more spending.
Nationally, it appears that most of the budget ‘cutting’ is a desperate attempt to hold down the future costs of entitlements and pensions.
JE, I was born and raised in California, and our Gov. Jerry Brown Calls For Extreme Austerity
(By Ben Cohen May 15, 2012)
“California Gov. Jerry Brown called on state lawmakers to embrace austere cuts.
“Brown proposed $8.3 billion in cuts across education, health care and welfare programs in laying out a plan to address the state’s $15.7 billion shortfall, an amount equal to 17 percent of the state’s discretionary fund. He warned that additional cuts are ahead if voters reject his tax-hike initiative in November.
“Cutting alone really doesn’t do it,” Brown told reporters in releasing his $91 billion general fund budget plan. “And that’s why I’m linking the serious budget reductions — real increase to austerity — with a plea to the voters: Please increase taxes temporarily on the most affluent and everyone else with a quarter of a cent sales tax.”
Brown, a Democrat, also is asking state workers to share the pain by taking a 5 percent pay cut, most likely by reducing their work hours. The pay reduction would be handled in contract negotiations with the state’s public employee unions.
California, the ninth largest economy in the world, resorts to austerity
California, America’s ‘golden state’, is slashing spending to avoid a Greek-style default.
Taking a deep breath, California’s most powerful man strode to a lectern and unveiled the fiscal policy that he hopes will keep America’s most populous state from falling into bankruptcy.
“You name it,” he declared, “and we’ve got to cut it!”
It wasn’t the most nuanced announcement. But this is no time for subtlety. After years watching his state fall deeper and deeper into the red, Governor Jerry Brown used a gloomy Monday night press conference to unveil what aides described as the ultimate in austerity budgets.
Welfare payments, healthcare for the poor, and benefits for elderly and disabled Californians will be immediately slashed by around $8.3bn (£5.2bn), which equates to roughly 17 per cent of Mr Brown’s entire discretionary budget. And state offices, which employ roughly 200,000 people, will switch to a four-day, 38-hour work week.
The radical proposals came days after it emerged that the Golden State, which is currently suffering 11 per cent unemployment, has a projected annual deficit of $16bn, far higher than the $9bn predicted in January. Its total debt is now around $40bn, giving it the lowest credit rating of any US state in recent history and prompting fears of a Greek-style default crisis.
Things may get worse before they get better. If voters fail to approve a series of temporary tax rises at November’s election, Mr Brown said a further $6bn of cuts will immediately be triggered, mostly targeting California’s education system and reducing the school year by three weeks.
That proposed move, described as apocalyptic by Mr Brown’s fellow Democrats, would also eliminate such iconic public services as the lifeguards who have historically presided over the state’s sun-kissed beaches.
“I’m linking these serious budget reductions with a plea to voters: please increase taxes temporarily,” Mr Brown told reporters in the state capital of Sacramento.
The drastic cuts underline California’s position at the sharp end of a debt crisis which is slowly engulfing local and state-wide public finances across America. Stockton, an hour’s drive north-east of San Francisco, recently became the biggest city in the nation to declare bankruptcy.
This year, even with Mr Brown’s latest round of cuts, the state will spend roughly $91bn but only raise $83bn. If allowed to continue, it could find itself unable even to service existing debts in a matter of months. “California has been living beyond its means,” Mr Brown said. “The USA and its federal government is living beyond its means. Well, there has to be a balance and a day of reckoning.”
Fixing the crisis has eluded successive governors, including Mr Brown’s predecessor Arnold Schwarzenegger. Tax rises have for years been blocked by Republicans in the state Senate, who are able to exploit a law mandating that all increases in revenue must gain the approval of 60 per cent of legislators.
Governor Jerry Brown used a gloomy Monday night press conference to unveil what aides described as the ultimate in austerity budgets.
Welfare payments, healthcare for the poor, and benefits for elderly and disabled Californians will be immediately slashed by around $8.3bn (£5.2bn), which equates to roughly 17 per cent of Mr Brown’s entire discretionary budget. And state offices, which employ roughly 200,000 people, will switch to a four-day, 38-hour work week.
The radical proposals came days after it emerged that the Golden State, which is currently suffering 11 per cent unemployment, has a projected annual deficit of $16bn, far higher than the $9bn predicted in January. Its total debt is now around $40bn, giving it the lowest credit rating of any US state in recent history and prompting fears of a Greek-style default crisis.
Things may get worse before they get better. If voters fail to approve a series of temporary tax rises at November’s election, Mr Brown said a further $6bn of cuts will immediately be triggered, mostly targeting California’s education system and reducing the school year by three weeks.
That proposed move, described as apocalyptic by Mr Brown’s fellow Democrats, would also eliminate such iconic public services as the lifeguards who have historically presided over the state’s sun-kissed beaches.
“I’m linking these serious budget reductions with a plea to voters: please increase taxes temporarily,” Mr Brown told reporters in the state capital of Sacramento.
The drastic cuts underline California’s position at the sharp end of a debt crisis which is slowly engulfing local and state-wide public finances across America. Stockton, an hour’s drive north-east of San Francisco, recently became the biggest city in the nation to declare bankruptcy.
Fixing the crisis has eluded successive governors, including Mr Brown’s predecessor Arnold Schwarzenegger. Tax rises have for years been blocked by Republicans in the state Senate, who are able to exploit a law mandating that all increases in revenue must gain the approval of 60 per cent of legislators.
From usgovernmentspending.com
California spent $162b in 2011. It is proposing to spend 159.8 billion in 2012 in order to get the budget shortfall under control.
That’s $3b less in proposed spending, hardly a bread and water budget.
California spent 122.9 billion in 2004.
Other numbers comparing 2004 to 2001:
Pensions: 15b to 23b.
Health care: 30b to 37b.
Welfare: 16b to 23b.
When any public official says he is ‘cutting spending’ he means he is cutting the rise of future spending.
Schwarzenegger served as the 38th Governor of California from 2003 until 2011
Total Spending from usgovernmentspending.com
Fiscal Years 2000 to 2011
Year GDP-CA $ trillion Population-CA million Total Spending -state local $ trillion
2000 1.31734 33.995 0.23 Davis
2001 1.33805 34.486 0.27 Davis
2002 1.38575 34.876 0.29 Davis
2003 1.4603 35.251 0.31 Schwarzenegger
2004 1.5712 35.558 0.33 Schwarzenegger
2005 1.69199 36.039 0.34 Schwarzenegger
2006 1.80078 36.279 0.36 Schwarzenegger
2007 1.87478 36.520 0.39 Schwarzenegger
2008 1.91174 36.763 0.41 Schwarzenegger
2009 1.84705 37.008 0.43 Schwarzenegger
2010 1.90109 37.254 0.43 Schwarzenegger
2011 1.95982 37.692 0.42 g Brown (usgovernmentspending.com “guess”)
JE, You can see from this that California has the money. The problem is that there are so many tax expenditures/loop holes especially among our corporations, and our older homeowners that there is not enough moola being raised to pay for the what California’s used to get in the 1960s 1970s 1980s and 1990s. So Brown has to cut spending as do all our counties and towns.
According to Cullen, the Fed’s QE is a downstream project. The deficit spending must come first. Unless there is deficit spending during our current deflationary/de-leveraging process, the folks on the ground are going to get screwed by the banks because they can’t pay the interest on their home re-fi mortgages or send their kids to college (for example). The banks screwed up and many trillions of debt dollars were lost.
KRUGMAN on “This Week” was just trying to explain that IN FACT (see CA data), USA as a whole is cutting back spending just at that time when we need more Fed deficit spending passed on to States. If spending reductions continue as planned by Mitt we will see recession and credit deflation, just like they have in Greece, but all over the world this time. Since the world’s macroeconomy is being held together by spit and spiderwebs the USA could screw up again and send the whole thing into a worldwide fiat currency panic just like 2008.
dennis,
if you look at the breakdown of the spending you will see that the increase has been toward greater and greater percentage to retirement obligations and not toward present spending. in effect, we have continue to get less for our tax dollar toward real betterment of the citizens. instead we continue to pay for people who worked roughly 20 – 25 years of service a cushy retirement lasting many decades. this situation has been swept under the rug for so many years that it is now coming to a boil. CA taxpayers are saying enough is enough… some of these obligations need to be rein in because the taxpayers aren’t gonna roll over and continue to fund ca state workers plush retirement forever…
just a fyi… i was also a ca state employee with pension vesting that should start when i am about 61 – 62 year old. i personally don’t expect to see that obligation fulfilled so i take personal responsibilty to ensure that i will have enough when i retire.
My brother was lifetime CA teacher, e.g. a California public employee. No federal Social Security for him, only this Calif. program. He also doesn’t have enough working quarters for medicare. He is now retired and getting what the CA teacher’s union signed him up for … I guess. It’s actually not the current retires that are in trouble, it’s the ones that are putting in their moola today. Just like today’s federal SS, only one real difference, Uncle Sam can print the moola, CA cannot.
I understand Dennis. Just that if you look at the obligations and promises that were made to the public unions in the state of CA, you will see why there is a giant disconnect between how public unions see the pensions vs what the CA taxpayers sees. BTW the deals that CA teacher union have are very good, probably better than most people will ever see in their lifetime. I have 5 current teachers in my immediate family (all young with about 3-8 years of experiences.) Their benefit package is incredible. I think they contribute a pretty small amount to their retirement but there are rumors that it will start to increase. Most of the older teachers have it very easy (due to tenures) and have existing contracts that allowed them very little contributions to their retirement plans…
Cullen, you said: “Ignore the bazooka effect at your own risk. It’s on the table and central bankers are ready to pick it up.” You nailed it, at least for the short-term. Futures are way, way up on news of the new $ 125B bailout of Spanish banks. Looks like equities could be up more than 1% across the board on Monday, adding to last week’s gains. The bazookas have not run out of ammo yet. Question: will this bailout rally last more than a few days?