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FOMC will do more, not less....
Non-Independent Investment Research
This week had three event risks: The German Constitutional Court ruling, Dutch election and now today the FOMC meeting. Two down one to go....and this one could the 'surprise':
The market is expecting no major change from Fed or at a maximum a change to the outlook to include 2015 from 2014, but...I, as per usual I guess, disagree:
The minutes, the 'leaks', the tone and the focus inside the FOMC have changed for two reasons:
1. The dual mandate has become a single mandate: jobs, jobs and jobs. Even Bernanke is frustrated that his monetary experiment have gotten him close to nowhere in terms of changing the dynamics of the US job market. The US economy have stabilized but not found a new growth path. Fed wrongly continues to believe the unemployment is cyclical, we have long argued its structural(wrong skills, wrong locations, poor average education)
2. The fiscal cliff. The price tag on the fiscal cliff if nothing is done is 3-4 pct of negative GDP due to the automatic cuts and overall austerity. This would be good for the fiscal deficits but....as in Club Med in Europe the negative multiplier would take US growth to the brink or beyond leading to recession. The political negotiations will need to soften this blow but considering the shenanigans of last years debate there is real risk this will end in compromise where GDP is 'only' impacted by 0,5-1,0 of GDP.( Which is about minus 100 points in S&P)
My 'more' view is based on the need as seen by FED to soften both the blow to unemployment but more importantly to negative growth coming from fiscal cliff.
I see unsterilized asset purchases, extension to 2015 and maybe more explicit policy targets- in other words a full blown QE3.
The market using history says: listen, stock market is not down and US economy is humming along nicely, there is no need for policy change.
I agree with the no need for change, as my number one premise for creating positive growth is to 'do nothing' for years letting the micro-economy adjust and take over from the macro policy mistakes, but......Bernanke and his friend around the world are Keynesian's, they believe firmly in their own abilities to save the world, and most importantly they don't want to be blamed for doing nothing.
Instead they are creating the financial market equivalent of Ground hog Day: This week China announced 100 billion USD worth of fiscal stimulus, Europe agreed to yet another 'rescue fund or mechanism' and the US will print more money... It's so 2008....and its again the Einstein's definition of an idiot: Keep repeating the same experiment expecting different results and you are an idiot.
Market reaction to this will be higher gold(test of 1800?), weaker US Dollar(1,3150?) and a test of stock market highs (1450/60?)
I do however still think this is the fifth and final wave meaning any major moves will be faded and sold by me - the monetary policy's ability to change the macro direction stopped two years ago, this week we may see the end of its ability to take stock and risky assets higher. There is only one cheap asset left in the world: Money, and that's a warning signal to the listen to.
Trades over the FOMC: We will, STST Steen Macro, buy a Friday Gold call, but more in this later. We are long EURUSD as per yesterdays recommendation, took loss in AUD.USD.
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