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2013-06-26 08:38:21
Jun 20th 2013, 10:21 by Buttonwood
CALL it a trifecta. After the Fed announcement yesterday, the Dow fell 200 points (and European equities are down 2% this morning), the 10-year Treasury bond yield rose to 2.38% and gold is down more than 4% to a two-and-a-half-year low. It takes a remarkable piece of news to send all three markets lower. Of course, not everything has fallen; currencies are a zero sum game and the dollar is up on the news (presumably on the grounds that the supply of dollars is being restricted).
In essence, the Fed is talking of a three-stage process - tapering (the slowing of asset purchases) which will start later this year if the economic improvement continues; the ending of asset purchases (when unemployment falls to 7%, perhaps next year); and a return to normal monetary policy (which could involve higher rates or an unwinding of QE) which would require unemployment to fall to 6.5%.
One could quibble with the details (why 7% and not 7.1% or 6.9%) but there is an underlying logic that is easy to appreciate. Investors reacted, however, like trust fund kids being told that daddy is going to cut their monthly allowance. How are they going to cope without the Fed's largesse?
It is a sad state of affairs that the supposed "masters of the universe" who pride themselves on their Darwinian skills in beating the market should be so dependent on what is, in effect, an arm of central government. As has been pointed out before, the rich have done very well out of QE; never mind "welfare queens", these are the welfare kings. Bill White was warning about the dangers of this approach at the BIS well before the crisis; he has an excellent update here.
It looks as if we are headed for a period in which good news on the economy is bad news for the markets. When unemployment falls (ordinary folks have jobs!), equity markets will tumble because the end of QE is growing nearer. This also creates a game, well known to parents of toddlers, in which investors, if they scream and stamp their feet enough, might get their own way. Mr Bernanke seemed sanguine about the rise in Treasury bond yields so far but what if the 10-year hit 3%, or 4%? What if equity markets had another Black Monday, or at least a 25% fall over a matter of weeks? Perhaps the Fed would revise its sums.
The old saying is that the best way to make God laugh is to tell him your plans. We might get to tapering but your blogger doubts whether the end of QE is coming as soon as the markets fear. The US economy may not look that bad but things are slowing in the emerging world; China recorded a weaker-than-expected PMI today while there seems to be a credit squeeze going on.