Morning Bid: Speculation and Saving

October 25, 2013

(The author is a Reuters editor. The views expressed are his own.)

Closing out the week, the market is looking into next week with the knowledge that in addition to earnings, the Federal Reserve is out there on the docket.

They’re not going to do anything at the October meeting. In a sense, they’ve done enough, and it’s not clear that what they’ve done is building a lot of confidence right now.

The Fed’s decision not to take action in September, looking at it a month later, appears to have been them stumbling into good luck, thanks to the House of Representatives’ asinine decision to shutter the government that raised short-dated interest rate costs and dropped Congressional approval ratings to somewhere below the stuff that collects at the side of your lips when you’ve been talking too long.

But it also continues a pattern that John Mauldin of Millennium Wave Investments pointed out the other day – one that punishes savers and helps speculators, and keeps the morphine drip going at a time when the markets were actually ready to let it go, if only a little.

“I can’t believe they didn’t do it,” he said the other day, when it was noted that the Fed’s summer talk was one of the few instances of successful jaw-boning in the history of central banking, ever. (Even now, Richard Fisher of Dallas, one of the bigger hawks, thinks it’s not a good time to cut back on the Fed buying … and he’s nearly as hawkish as they come.)

To wit: The dollar has continued to sink – after flirting with gaining strength, the greenback has slumped again, nearing a two-year low against the euro as it remains clear that U.S. yields are going to continue to remain tethered – the euro hit $1.38 this week, and three-month risk reversals (a way of measuring interest in euro/dollar options) have been trending steadily in favor of fewer people expecting a fall in the euro over the last several weeks. The same pattern was seen in one-month risk reversals – the overall trading still favors, just barely, those who are buying protection against a euro decline, but that level sits nearly at break-even now, meaning the betting is nearly even in terms of expectations for the dollar and euro.

So that’s a speculation of some kind, as well as an admission that the U.S. dollar just ain’t what it was, be it in terms of the Fed’s communication abilities or the ability of lawmakers to find a way to reduce the long-term debt trajectory (which is often overstated, but can’t simply be wished into nothingness).

It’s almost as if the economy has hit reset after a turbulent but promising summer. Growth remains weak, earnings figures are a mixed bag, alternating between the likes of Whirlpool, which showed nice demand for appliances everywhere but especially overseas, to Caterpillar, which bet too heavily on mining demand and reaps the spoils of that bad bet (and hopes that perhaps dollar weakness will at least bail them out overseas), and Ford, which sees stronger overseas demand and decent US truck demand as well. Economic data is untrustworthy for now; good figures are met with skepticism, and lousy figures prompt fist-shaking in the direction of the Capitol Building.

But above all, borrowing costs remain quite low – and in the absence of demand, that’ll continue to help the speculative parts of the world, making the possibility of a real fall in Netflix, Groupon or Tesla shares a harder bet to take right now. It’s what Bank of America-Merrill Lynch analysts termed the “strong market conviction in Bernanke-care,” suggesting 2014 might end up being a year of speculative excess, rather than one where rates and stocks “normalize” (read, fall).

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