2 years of prestidigitation unwinding

Two long years ago in August 2010, the US Federal Reserve announced plans for wide scale asset market manipulation at the annual Jackson Hole Conference in Wyoming starting with the now infamous “QE2” program. Other central banks joined the master plan thereafter with wave after wave of “stimulus”, intervention and bank rescues on taxpayer tabs. The below chart of the Euro tells this story. A currency that was highly over-valued 2 years ago, was pumped back up with global speculation and liquidity only to recently succumb once more to the natural forces of mean reversion. In this sense the Euro has become the very face of the risk trade and begs the question– what next oh great monetary magicians?

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

The renewed plummet in the Euro casts a foreboding shadow on stock and commodity markets which have yet to fully follow suit. The S&P remains some 35% above its level of summer 2010. As the global economy sinks further into recession, stocks rebound today on Euro short-covering going into the weekend. A crucial distinction in all of this is that in the summer of 2010 the world was widely believed to be coming out of recession and thus there was great hope in the power of monetary policy. Today we have the opposite reality.

Not only have monetary bullets now been spent, but the weight of the extra (reckless) debt piled on the past 2 years is now compounding to pull the world economy down even faster.  The disconnect between plummeting global demand and still inflated stock markets is further captured in this updated chart of heavy equipment maker Caterpillar stock (CAT) vs. the Dow 30 Index.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

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4 Responses to 2 years of prestidigitation unwinding

  1. hrry wang says:

    What a comment, cut through all the cheese!

    Human race, as a group, survived mostly due to our good genes, which were perfect for our ancestors’ survival.

    Some of these genes are now in conflict with the modern world which “We” built. As always, we over believe our own wisdom. But, in the end, Mother Nature always wins.

    Like human, Feds/Central banks/Governments, all believed their own power & wisdom. They now all behave like the Masters of the Universe.

    Too bad, in the end, the “Mother natural’s laws” will show it’s hand & will humble us all, including the smartest minds in our Central Banks.

    my 2 bits.


  2. Andrew says:

    A simple way I look at riskier markets:
    TIPs have a negative real yield
    NIPA US Corporate profits with inventory valuation adjustments and capital cost adjustments have rolled over
    Canadian resource heavy equity indexes have been in negative trend since March 2011 and strong negative trend since July 2011.

  3. Attila Balazs says:

    A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank. Theoretically, the S&P 500 would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed. Posted on the New York Fed’s web site Wednesday, the study sought out to explain AP why equities receive such a high premium over less risky assets such as bonds. What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes. For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices.

  4. mommybomm says:

    I’m not going to worry about it too much right at the moment. Its SUMMERTIME!
    And summer is an attitude, not a just another season.

    Lighten up everyone, life goes on until it doesn’t. Don’t worry about losing your/your clients money. You might just get hit by a bus, and its over.

    OBTW: Could you see how CMG and AAPL did against the Dow since Sept 2010?
    I think the world consumes more burritos and I-phones than it does ‘bulldozers’.

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