Is it really magic in the air?
Never let your feelings get you down.
Open up your eyes and look around
It's just an illusion...illusion...illusion
The Fed was able to do with the minutes of its last gathering what President Obama couldn't the day before - scare the hell out of the market!
In many ways the White House and Federal Reserve work toward the creation of illusions. In the case of the White House, it is making people think the economy is great and gathering momentum but too fragile to withstand a 2% hit to spending. The Federal Reserve has almost the inverse problem, as it must create an illusion of wealth that triggers actions that actually spur the economy and maybe generate wealth in reality. On Tuesday the President hinted at an economic slowdown that wouldn't be his fault while the Fed hinted at an economic recovery that may no longer need steroids.
The market ignored the Commander in Chief but went into a tailspin at the thought the Fed might remove the punch bowl. Sure, it is welfare for rich bankers and makes life easier for industrialists, but the idea that stocks would move lower on what would have to be considered (real) positive economic developments is somewhat unnerving. At what point does the Street hoist champagne and celebrate a positive economy? Well, the answer would be when the economy is truly positive. Despite the never-ending caravan of analysts and mavens lining up to vouch for the economic recovery, when push comes to shove they take their chips and hide.
Push come to shove means the Fed folding up the tent and putting away the Kool-Aid.
So, consumed with worry about such a fate, I think the Street overreacted yesterday and in fact I'm surprised traders didn't see positives in the minutes. Of course when it comes to the Fed I've always said watch the market the next day, as the day there is news traders follow emotions and the crowd and typically panics. The thing now is investors have questions about the Fed until the monetary body gathers for two days in late March. This means the street will root even louder for "disappointing" news from all the data including the next jobs report.
Considering presidential protest about the harsh and immediate impact of sequestration I think the fix is in for ugly economic data around the corner, the kind of news that keeps the Fed priming the pump.
Fed Minutes & Meanings
One word that leapt out at me was "efficacy," which has several meanings:
1. Power to produce an effect.
2. Capacity for beneficial change of a given intervention.
Fed action always endeavors to produce an effect but this time around the desired reaction has yet to materialize. The idea the Fed would quit before that desired effect happens is suicide since the biggest weapon the Fed possesses is the natural assumption there will be success.
On that note, I consider the other definition more appropriate. In medicine, drug creation is tested first for efficacy to make sure would-be cures don't work so well they actually kill the patient. At some point $85.0 billion a month coupled with a couple trillion already added to the balance sheet will have a gigantic impact.
The question is how beneficial to the patient has all this free money been?
The needle is moving on housing and it's helped the stock market but unemployment is a disaster and probably will not get better (remember President Obama has hinted if sequestration goes through the rate could tick higher - that means it's already poised to tick higher) anytime soon.
So Good, So Strong and So Fragile
Searching for a destiny that's mine
There's another place another time
Yeah, hoping that I'll never have to say
It's just an illusion...illusion...illusion
President Obama is layering it on thick these days about automatic spending cuts that he created in a lab like a mad scientist. Just like Dr. Frankenstein, he loved his handiwork as it validated he was smarter than the other guys, but he came to realize his monster couldn't be controlled. And so it is that the sequestration, the monster that was borne from the mind of Obama, is now the beast he desperately wants to kill. I'm not sure what changed from the time in 2011 when he said the deal would force us to live within our means.
What I don't get is where do cuts come from? Heck, it was only a few weeks ago that President Obama got $41.0 in tax hikes for each dollar of spending cuts but he wants more taxes. There is no way to grow an economy with wave after wave of higher taxes. There was low-hanging fruit and yet corporate welfare and politically correct stuff was given a pass. So, how does it work, where can we cut?
The blame game is silly and self-serving and not what we need at this time. The nation needs a boost. The nation needs a boost beyond the artificial money creation of the Fed and spending of the federal government. No more illusion, no more lies - something to believe. That something we'll feel just as we feel pain in other areas of our lives. What's happening in Washington isn't ethical. It's a shame the White House wants the stock market to crumble in order to press its case but then again selling fear has worked politically.
Economically if selling fear worked, the Fed would be at the beach and their balance sheet back to $1.0 billion instead of $3.0 billion.