Van Eck Hotline on Money and the Economy
For: Monday, December 16, 2013
(800) 219-1333. VetHotline@aol.com. www.vanecktillman.com
For a while during the past few weeks, Wall Street began to make sense regarding the Federal Reserve and tapering. Most of the economic data of late has come in stronger than expected. Inflation remains low (at least if you believe the numbers released by the federal government). Over in the stock market, the bullish ranks have become quite crowded. Even if Fed officials refuse to acknowledge the situation in public, Ben Bernanke and others must know that the stock market is looking a bit frothy of late. If this week’s FOMC meeting comes and goes without any kind of change in Fed policy, the bulls would almost certainly use the low trading volume conditions typically seen during late December as an opportunity to push the stock market above the recent all-time high. When confronted with the stronger than expected reports on employment, GDP, home sales and retail sales in recent weeks, many Wall Street analysts shifted toward a December tapering stance. Now that we have entered the actual week of the FOMC meeting though, some of those same analysts have gotten cold feet.
The stock market got off to a strong start today. As the financial media struggled to explain the rally, attention quickly focused on the theme that the Fed is sure to leave QE unchanged at this week’s meeting. Indeed, just about everybody that believes the Fed will take a pass this week also believes that the central bank will wait until the March 18-19 meeting before cutting back on the $85 billion monthly pace of asset purchases. Most of the taper delay crowd tends to offer up the same talking points. At the core of their argument is the premise that the Federal Reserve doesn’t like to tighten monetary policy late in the year. The idea behind that reasoning is that the Fed doesn’t want to disrupt consumer confidence during the holidays. On the surface, that certainly seems like some sound analysis. However, we are not living in ordinary times. By a variety of measures, we are in the midst of an unprecedented period of Fed easing. For a number of years now, the central bank has been pumping hundreds of billions of dollars of excess liquidity into the financial system. Like water finding its way down a hill, some of that cash has flowed into stocks. That has resulted in a string of record highs in the broad market this year. If the Fed waits until March before tapering, I have to wonder just how much higher the bulls would take stock prices during the months ahead.
With big gains in equity values during the past few years, many households have received an upside jolt to their wealth. The initial recovery in housing has also helped to bolster millions of households. Bernanke has pointed out such wealth creation on a number of occasions. It is certainly possible that the FOMC will choose the riskier path and keep feeding the developing bubble in equities. In my opinion though, the Fed needs to stand up against all the pressure from the Establishment and back off from super liquidity mode. If the bank waits another three months to start that process, we could be looking at a situation where stock prices are so inflated that the post tapering reaction would dent confidence far more than would be the case if action is taken near current levels. It is worth noting that Bernanke will be holding a press conference after this week’s meeting. There is no press conference scheduled for the post January 28-29 meeting. That means this will be Bernanke’s last chance to tell a wide audience what he thinks is going on with the economy and what the Fed has planned for QE and interest rates. The next post meeting press conference is not scheduled to take place until March 19 – when Janet Yellen will be running the show. If the Fed sits on its hands this week, things could overheat in a hurry. More on Thursday morning.
Next hotline will be updated no later than 12:00 P.M. Eastern on Thursday, December 19, 2013