September 4, 2016 Zero Bound

Risk/Reward Vol. 320

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

I have said it before (see Vols. 172 and 173 www.riskrewardblog.blogspot.com), and I will say it again: in today's bizzaro financial world, tepid, even bad, economic news is good for the stock market. The answer as to why is simple and has been the same for the past several years: namely, bad economic news lessens the likelihood that the Federal Reserve will raise interest rates. With interest rates at or near zero, the only game in town is stocks. So people keep buying, and stock prices keep rising. No better example of this occurred on Friday. In advance of the jobs report, the Dow Jones Industrial Average (DJIA) and S&P 500 futures were negative. Once the disappointing numbers were announced, the indices spiked into positive territory where they remained from opening through closing. Both the DJIA and the S&P 500 now sit within an eyelash of all time record highs. They would be even higher if Federal Reserve Governor Lacker had not suggested mid day Friday that a rate increase at the Fed's upcoming September 20-21 meeting was still a possibility. This was a head fake, believe me. As I have written previously, the Fed, comprised mostly of DC insiders, is not going to jeopardize Ms. Clinton's chances of election by surprising Mr. Market with a September rate increase. Indeed, Mr. Market is placing the odds of such an event at less than 20%.

If you doubt the outsized impact that the Federal Reserve has on the stock market, I suggest you Google "Kevin Warsh and S&P 500" and read his August 24, 2016 article in the Wall Street Journal. Mr. Warsh, a former Federal Reserve governor, is highly critical of his former employer especially its influence on every aspect of the financial markets. In that regard he observes "a simple troubling fact: from the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of the Federal Open Market Committee decisions." Re-read that quote, and then tell me there won't be a rude awakening in the stock market if and when the FOMC raises rates in earnest. Of course, that presupposes that it will. The Bank of Japan has not for more than 20 years. We may be in for more of the same.

Have you noticed that more and more commentators are losing patience with central bankers? Larry Kudlow went so far as to suggest in a tweet that "Fed needs to be leveled & start over. Get rid of phd's failed models" Jim Grant, among the world's most respected students of interest rates, recently observed that in over 5000 years of government borrowing this is the first time that a significant percentage of sovereign debt ( $16tn/$64tn=25%) has had a negative yield. The situation is unprecedented and central banks appear clueless on what to do next.

But enough negativity. There is nothing that this writer can do to change events, and I do not see any change on the horizon. Besides, the stock market is booming---so what the hell. After the upcoming Fed meeting and OPEC conference both scheduled for September, I may re-enter myself. I have a list at the ready.