What Is Wrong With A Win-Win Mentality On Wall Street?

Includes: DIA, QQQ, SPY, TLT
by: BubbleBustInvesting

For more than three years, Wall Street has had everything going its way:

  • An ever accommodating Fed, pushing almost every major interest rate near zero -- in essence, providing free money to Wall Street to chase after every asset category.
  • A falling dollar, cushioning economic growth and helping major exports recover nicely from the 2009-lows.
  • A reputation as the world's safe haven, as the rest of the world -- most notably Europe - went off the fiscal cliff.
  • An ever-accommodating Washington, renewing the 2001 Bush fiscal package, even as the economy recovered.

All these tailwinds created a sense of complacency among traders and investors, a win-win mentality reflected in two scenarios:

Scenario 1: Fed accommodation and fiscal easing will eventually help the economy grow - good scenario for Wall Street.

Scenario 2: The economy deteriorates; Fed accommodation and fiscal easing continues - good for Wall Street.

Scenario 3: Washington can continue to pile up debt forever to cushion any short-fall in economic growth.

That can explain why all major equity indices have been pushing towards new highs in the last year, even as U.S. Treasuries continued to rally - iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT) is up 4 percent for the last twelve months.

Major Equity Indexes


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Powershares QQQ Trust (NASDAQ:QQQ)




SPDR Dow Jones Industrial Average (NYSEARCA:DIA)




The trouble with these scenarios is fourth-fold:

First, as the Fed drives interest rates near zero, it eliminates an important signal of the market system that helps investors allocate funds efficiently and effectively, fueling bubbles that will eventually come to haunt Wall Street, as was the case in 2008-9 crash-preceded by Greenspan's "put."

Second, fiscal easing works miracles when it begins from low debt-to-GDP ratios, as was the case in the 1980s. But it can be disastrous when the trigger points are reached, as was the case in Greece, Spain, Portugal and Ireland. That's why Wall Street has become so sensitive to political deliberations over fiscal policy in Washington.

Third, an accommodating Fed doesn't seem to help the U.S. consumer, a evidenced by much weaker than expected Consumer Confidence released today, 59.7 versus an expectation of 66.9. Add to that a weaker than expected Consumer Sentiment report out of University of Michigan last week, 71.8 versus the figure 79, which the market expected -- reflecting, perhaps, concerns over the rise in payroll taxes and looming government spending cuts.

Fourth, an accommodating Fed doesn't seem to help major multinational corporations see their profits grow, as evidenced by profit reports out from Oracle (NYSE:ORCL), Federal Express (NYSE:FDX) and Caterpillar (NYSE:CAT).

The bottom line: Wall Street's tailwinds may be about to turn to headwinds, fueling a momentum shift, from complacency to fear. Investors should be very careful in committing new money to the market at this point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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