Juggling Dynamite

Much was made of the July 31 FOMC meeting minutes yesterday noting that “many” of the members think more QE may be necessary if economic conditions do not improve. In fact however this wording is not a surprise in the sense that 8 of the 10 voting members on the FOMC are considered “doves” who have a constant bias toward more easing. So there is nothing new here, 80% of the committee are always in favor of more intervention.

More important I think, is that since the July 31 meeting traders have ramped up stocks and key commodity prices (ie food and energy) in anticipation of further monetary ease. This also caused a sell-off in treasuries and the commensurate spike in borrowing costs. These Pavlovian responses in market prices present the Fed with a problem now since $4 gas prices, $8 wheat and higher mortgage rates are serious blows to the spending ability of weak consumers. Spiking subsistence costs are an even greater wallop in developing countries.  Note: Chinese factory activity slumped to a nine-month low in August against expectations of a modest pickup. These are constraints on the global economy that were not as pronounced at lower prices 4 weeks ago.

In effect then, just considering more QE, the central bankers have further harmed the economy over the past month. If the Fed rolls out more in September this will only poison the patient further. As we have explained for some time now, more easing is now only lose-lose. Which means toppy stock prices have some ‘splainin’ to do in the weeks ahead.

Today the latest FOMC minutes confirmed what we had suspected: falling economic data and mayhem in Europe are prompting the US Fed to conjure ideas for the next round of monetary tricks.

Trouble is that nothing they scrape off the bottom of their empty barrel is likely to have much impact on the economy here. Risk markets have already ramped up in anticipation of more stimulus and as a result have become even more over-valued in the face of falling global growth. US bonds have also anticipated the prospects of more stimulus by selling off over the past 6 weeks. But if traders bought the rumor of more QE, this afternoon the trade seemed to be ‘sell the news’, as stocks fizzled and bond prices firmed into the close.

Gary Shilling was a guest on Bloomberg this afternoon discussing these developments. Here is a direct link.

In my experience the financial advice business is largely populated by those who are financially inept in their own affairs and dangerously undereducated in their supposed field of expertise.

Part of the problem has been low barriers to entry where pretty much anyone with a smile and a suit can call themselves a financial expert. The other problem has been lack of serious professional standards in a an industry that is primarily driven by the sales side: scale, cross-selling, bonuses and commissions.

In reality it is not that hard to require high academic accreditation, transparency and ethical standards from those who give advice. We have done this successfully in other professions where for example, lawyers, dentists and doctors oversee their own self-regulating organizations and standards. Its just that in finance, the sales firms are in charge of their self-regulating organizations and standards, and they do not operate under oaths of “do no harm” and serving the “best interests of the client first”. Hence the disaster we call the financial advice business today. This article highlights some of the problems for consumers. See:  Protecting Seniors from financial abuse

“In a new survey, the CFP Board revealed just how pervasive the financial abuse of seniors has come to be. At the same time, the board is seeking new standards to helps seniors – and all consumers – better understand which self-described financial advisors are truly out to serve their best interests.

“There are 142 designations for financial advisors,” says Marilyn Mohrman-Gillis, managing director for public policy and communications at the CFP Board. “We determined that most of them actually have nothing at all behind them other than a weekend course with an open book test and then you get three letters behind your name. They are basically worthless.”

To help distinguish the pretenders and sales people from authentic advisors, the board is asking the Consumer Financial Protection Bureau (CFPB) to create a ratings system for financial certifications and designations.”