Uncertainty the New Norm
NEW YORK ( TheStreet) -- World markets spent the last week trying to make sense of the tightening signals from the central banks of the U.S. and China.
The timing of the announcements -- Federal Reserve on June 19, the People's Bank of China on June 20 -- was accidental. The PBOC was merely acting on prior set policy while haplessly watching the news and market updates resulting from Fed Chairman Ben Bernanke's comments the day before. Chinese policy has always been known for its dogged determination to the point of stubbornness.
If Bernanke meant to signal policy flexibility at the conclusion of the last Federal Open Market Committee meeting on June 19, he did a terrible job. He went in length to say that the Fed would start discussing tapering in a few months, based on its current economic projection, but failed to emphasize with equal weight that the Fed would consider more accommodation if the projection proves to be wrong.
Last week, numerous central-bank officials scrambled to save the markets afterward, but in the end, added to the confusion.Then, on June 26, U.S. first-quarter gross domestic product was revised lower falling short of expectations and causing stocks to surge. That was a sign of liquidity expectation: bad news is good news. And I agree with this twisted logic. The only reason the Fed started the taper talk is it got fooled by some unusual events overseas, like the weaker yen and eurozone worries over the Cypriot banking crisis. As these international worries subside and hope of a strong, self-sustainable recovery in the U.S. diminishes once again, the Fed will resume doing the only thing it knows how to do -- provide liquidity. That's bad for the economy in that it exacerbates economic disparity and hurts the middle class, but it's good for the market. But this will take some time to play out, likely months. Since the Fed has stated the importance of the jobs and the housing markets, they deserve special attention from investors. My expectation is that the housing-market resurgence is a false start as mortgage rates rise and that the labor market will resume its painfully slow ho-hum recovery.
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