• Wall Street is lauding yesterday's Fed action as a much needed rescue.
• The Fed's action seems largely symbolic—small rate moves don't have much fundamental impact.
• Bull market corrections generally resolve themselves when a perceived tragedy seems to have been avoided—which is precisely how the media is portraying the Fed cut.
• In our view, fundamentals remain positive and the economy healthy.
As fallout from yesterday's Fed decision percolates, we're struck by an interesting phenomenon. In the history of Hollywood—nay—in the history of storytelling, to our knowledge no drama has ever hinged on the plucky determination of a central banking protagonist. Lawyers? Sure—TV and movies are lousy with them, both as heroes and villains. Teachers are always the good guys, Wall Streeters the bad guys. Pilots. Musicians. Waitresses. Superman was a journalist. Cops. Firefighters. Bored housewives. Indiana Jones immortalized archeologists. Architects have Ayn Rand and George Costanza to thank. But no Fed head ever fought Nazis, and no one ever wanted to pretend to be a central banker.
Yet, suddenly, central bankers have become archetypal heroes, and the media's love affair with mild-mannered Mr. Bernanke is palpable.
Wall Street's Reaction: Thank You, Ben
By Madlen Read, The Seattle Times
In summary, Ben saved the day. What else has Ben done?
He did it. Ben cured the credit crunch.
OK, not really. This move just isn't as important as folks want to make it seem. (For more, read yesterday's MarketMinder commentary "Saving the Day (And Not Much Else)"
But we're OK with that. We've said repeatedly in this space that this summer's volatility was classically characteristic of a bull market correction. Corrections are short, sharp drops fueled on a fantastic story that's later viewed as inconsequential or a tragedy that was narrowly averted.
Tragedy . . . narrowly averted. Isn't that exactly what the media is telling us?
The economy was never imperiled, and there was never a legitimate credit crunch—just outsized fear of a credit crunch. We've seen hoarded liquidity evidenced in plummeting short-term rates as long-term rates have remained benign—the very reverse of a credit crunch. (Read "Best Credit Crunch Ever" and "Blood in the Alleys".)
So if people want to fear a fake credit crunch, then why not applaud a fake rescue? That's pretty much how bull market corrections end.
Does that mean the correction is over? It's too early to tell—investor sentiment is mercurial—and corrections can W-bottom on a second sensational story as it did in 1998. Our view all year has been fundamentals are ripe for strong global equity returns (a growing global economy, strong earnings, benign interest rates, a do-nothing Congress) and nothing about that has changed. We're honestly a bit surprised by the big positive market response yesterday and today—then again, we were puzzled by folks seeing a credit dearth when liquidity remained plentiful and cheap.
But the media's sudden embrace of Super Ben the market hero is very instructive for investors. There's no need for "credit crunch" rabble rousers to issue a mea culpa—they can simply say "Yep, that got fixed," and move on to incite other baseless fears. For instance, maybe Super Ben went too far!
In our view, risk of a large Fed error has increased slightly, but is still very remote. Yesterday's cut seems largely symbolic (what better to battle a fake economic crisis?) and further aggressive loosening seems highly unlikely. But the cut could be a signal to presidential nominees that Ben wants to be an accommodative Fed head—which we view as a risk. Ben has acted rationally to this point, but his term is still in its infancy. We're watching you Ben. We're watching you. (Incidentally, our vote is for a bearded John Malkovich to play Ben in the movie. If he's not available, then we're OK with Tom Skerritt.)
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