Yesterday morning, my wife says to me, “it’s going to be a nice week this week. Ninety-four tomorrow, ninety-two Tuesday, ninety-one Wednesday.” I say, “it’s funny how when we’re going from spring to summer ninety degrees feels super hot, but when we’re coming off of summer (Fresno is a hot place in the summer) it feels nice and cool.”
The forecast for the Fed this week is for the temperature to drop from 85 to 75 (billion dollars a month of bond buying with new money that is). And the street, at the moment, views it as a virtual nonevent. There were moments, however, during the past few months when the slightest hint of even the slightest cooling had stock and, especially, bond traders dawning their winter coats.
I wonder where we’d be had the QE3 number been, say, $65 billion to begin with? Would interest rates be 24% higher and stock prices 24% lower? Would mortgage applications have dried up, like they did last month, due to bondholders’ exodus in anticipation of the taper? I’m thinking the $65 billion would’ve been plenty hot, and whatever impact present QE has had on asset prices and interest rates would have been realized just the same. And today we’d be talking about a taper to maybe $55 billion, a number that—in my view—would’ve been met by the markets virtually the same as has today’s warm-enough $75 billion. Oh, but going to $55 billion now, after having been at $85 billion, would be as shocking as a snowstorm in Fresno. The difference being that while a September snowstorm in Fresno would be a little freaky, it would be viewed, nonetheless, as an act of nature. We’d all layer up accordingly, but nobody would be freaking out (save for raisin farmers that is). But when we’re talking the Fed and QE, we’re not talking nature, we’re talking climate control. Traders seem to have zero confidence in the economy’s ability to regulate its own temperature. I think they’re wrong, and I think the longer the Fed attempts to control nature, the harsher nature will be when it’s time to correct for the unseasonable growth occurring in, well—other than emerging markets’ currencies—we’ll have to wait, too long, alas, and see…