Kass: The Default Bull Market
This content originally appeared on Real Money Pro on Sept. 19.
NEW YORK (Real Money) -- Yesterday's decision by the FOMC not to taper was a big surprise relative to market expectations.
Above all, the Fed appears to believe that the economy is too weak to taper -- the Fed downgraded its erroneous domestic growth expectations for 2013-2014 -- and would be unable to survive without the continuation of excessive monetary stimulation.
The Fed calls the June-September bond market selloff "the rapid tightening of financial conditions." It is clear that the Fed is concerned when even a 10-year yield rise to only 3% is enough to jeopardize the trajectory of growth in the U.S. The housing market is (and has been) especially vulnerable.Jobs data are still weak. As I have continually emphasized, the employment picture remains poor. Labor participation is low and the jobs that have been added are low-paying. A budget showdown and possible government shutdown loom. Constructive fiscal policy is plagued by political divisiveness and inertia. The burden of growth lies on the shoulders of monetary policy. I, too, have been fearful of our addiction to interest rates and felt most observers were too optimistic regarding domestic growth (my growth slowing thesis/endorsement) within the framework of failed fiscal policy. Unfortunately for my shorts, my attention to weak economic growth, tepid corporate sales and profit growth (excluding financials) was wrong in focus. I thought after four-plus years of quantitative easing investors would get the point -- QE is losing its effectiveness, and we are likely in an extended period of subpar growth that might be accompanied by less-than-average P/E multiples. What surprises me is that by certain members of the Fed's own admission, the benefits of quantitative easing are increasingly called into question. But that did not keep the Fed from the surprising decision not to taper. I suppose its rationale is that the economy would be even worse without more cowbell. This ignores the downside to this policy -- namely, wealth/income inequality, a depreciating currency and a further abolishing of fiscal responsibilities from our leaders in Washington, D.C. As mentioned previously, perhaps the Fed is concerned about the upcoming budget negotiations. Perhaps the Fed was surprised to the degree that interest rates rose (and housing stalled) in the face of a mere mention of tapering four months ago.
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