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I started off by expressing the view that the U.S. monetary cliff (and the conclusion of quantitative easing) at June's end has suddenly grown more conspicuous with the publication yesterday of the FOMC minutes and it should scare investors in a lot of risk asset classes.
In response to a question by Tim about how large the consequences are , I said that when economies stumble (as they did in 2008-2009), public fiscal and monetary policy comes to the fore and defends against an acceleration of economic and corporate profit weakness, inhibiting natural price discovery. This is now being reversed, and absent more easing, investors are now going to experience a natural price discovery in stocks, bonds and gold -- with all those asset classes moving lower in price.
The Bernanke put might be still out there, but it now is far more out-of-the-money than the markets believed prior to yesterday's release of the FOMC minutes. I would argue that, especially as we move ever closer to the November elections, more easing is an idle threat by the
Fed to create the illusion of a Bernanke put for equity prices. After all, what politician or Fed member would be willing to risk more easing, which could create a ramp up in gasoline prices at election time?
What also has me concerned with regard to stocks is that, at a time in which monetary policy might be more neutral, we are seeing more ambiguous signs of slowing domestic growth:
Warm weather has pulled forward retail sales.
The 100% tax credit, which expired on Dec. 31, 2011 and has dropped to 50%, has likely pulled forward business spending.
Though the labor markets are in a clear recovery (off of a low base), other indicators are more ambiguous -- factory orders, industrial production, durable orders and personal income are disappointing, while aggregate manufacturing inventories such as autos (at General Motors(GM), in particular) are high. Wednesday morning, the ISM monthly services report disappointed, and, as Sir Art Cashin pointed out, the orders and backlogs were especially weak.
In response to Guy's question as to what investors might be missing, I suggested that the ramifications of U.S. political policy are underappreciated. The political gridlock now and likely after the election could result in an undesirable and growth-deflating rise in interest rates, even if the economy only muddles through. Already, refinancing activity is down in six of the last seven weeks. And refinancings serve as a source of consumer comfort (and spending) and could slow down the nascent recovery in housing.