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To QE Or Not To QE?

Daily State of the Markets
Monday, July 9, 2012

Good morning. I recognize that regular readers of my meandering morning market missive may very well roll their eyes at the idea of comparing the opening lines of the soliloquy in William Shakespeare's Hamlet to the current macro mess investors find themselves facing. Clearly the question of whether or not "to be" had a far deeper meaning in Hamlet. However, if you are interested, give the first few lines a quick read through and tell me that if by substituting "QE" for the word "be," the lines don't have some meaning in today's rather heavy hearted and dramatic global macro environment.

To be, or not to be, that is the question
Whether 'tis Nobler in the mind to suffer
The Slings and Arrows of outrageous Fortune,
Or to take Arms against a Sea of troubles,

Yes, you are correct; applying one of literature's most famous quotations to the problems facing today's central bankers is the very definition of trite. But after reading the four lines and making the referenced substitutions, I'm guessing that even an Econ 201 student can see what I'm getting at.

While I'm guessing that the members of the Federal Open Market Committee don't spend a lot of time quoting Shakespeare, the questions facing those in charge of keeping the world's most important economy out of the soup seem to apply. For it is clear that our hero, aka "The Bernank," has made keeping the USofA out of a self-reinforcing deflationary spiral his life's calling. One might even say that he is deeply passionate about his current quest as he once proclaimed that he would drop dollar bills from a helicopter in order to keep the economy moving.

The problem is that our economy's champion is faced with a monumental problem that doesn't seem to have an obvious answer and very little in the way of history to guide him. Thus, "The Bernank" may have to go with his heart on this one. And the good news is that for those awaiting his decision, the wait is likely to be rather short (the next Fed meeting is scheduled for July 31 - Aug 1).

To be sure, the stock market is also hanging on the question of whether or not "to QE." Rarely has this been as apparent as it was on Friday. With interest rates, spreads and CDS in Spain and Italy heading in the wrong direction, the stock market was predisposed to continue heading south. And then when the Labor Dept. announced that the economy had produced just 80,000 jobs in June, it looked like things could get ugly. And ugly they got as the Dow found itself down 195 points around the time the lunch bell rang on Friday.

The problem was that the gain of 80,000 jobs wasn't strong enough to give investors hope that the economy would soon rebound. Nor was the number weak enough to cause the Fed to take action. Thus, investors were left with the idea that the economy would perhaps "muddle through." And cutting to the chase, this just wasn't good enough. So, with Europe looking like it might implode, China slowing and the U.S. economy in "zombie" mode, things were not looking good.

At about 2:30 eastern time on Friday, the Twittershpere started joking about the idea of a rumor hitting the tape in order to spruce things up into the close. In its usual sarcastic tone, ZeroHedge opined that the market needs a Hilsenrath article to save the day (this was a reference to the fact that the WSJ's chief Fed watcher, Jon Hilsenrath, has become notorious for giving the algo bots something to work with whenever things look bleak). I joined in the fun by tweeting, "Paging Mr. Hilsenrath... Mr. Jon Hilsenrath... Please report immediately to the bull camp trading desk for your assignment."

While this was all in good fun on a summer Friday, I wasn't completely surprised to read that one hour later Mr. Hilsenrath had indeed been quoted as saying, "Weak jobs data increase likelihood of Fed action, but don't ensure"... and "Some officials interested in Fed mortgage bond purchases." In English, these two quotes meant that Hilsenrath, who is said to have an inside line to the Fed's inner circle, felt that the odds of QE3 had improved and that the Fed would target MBS (mortgage backed securities) in its next program of security purchases.

Being nothing if not diligent, the computers picked up the quotes and before you could confirm the spelling of quantitative easing, the S&P was moving up. Suddenly there was hope again. Hope that our story's hero would come to the rescue with yet another plan to do something (anything!) to keep the economy from following Europe into recession.

So, if you find yourself confused by the volatility we will undoubtedly see in the markets over the next three weeks, just remember the key to the game right now in the U.S. is one very simple question...

Turning to this morning... Although Asian markets took a fairly substantial hit on worries over slowing growth, European markets are only slightly lower - perhaps on hope relating to yet another meeting of Eurozone finance ministers today. In any event, U.S. futures are currently pointing to a modestly lower open at this time.

On the Economic front... There are no important economic reports scheduled for release today.

Thought for the day... "The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails." -- William Arthur Ward

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.93%
    • Shanghai: -2.38%
    • Hong Kong: -1.88%
    • Japan: -1.37%
    • France: -0.19%
    • Germany: +0.13%
    • Italy: +0.66%
    • Spain: -0.61%
    • London: -0.36%
  • Crude Oil Futures: +$0.28 to $84.73
  • Gold: +$7.20 to $1586.20
  • Dollar: higher against the yen, lower vs. euro and pound
  • 10-Year Bond Yield: Currently trading at 1.519%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -3.23
    • Dow Jones Industrial Average: -31
    • NASDAQ Composite: -2.14

Positions in stocks mentioned: none

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For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com


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