Did Bernanke Spark the Rally?
All too often, pundits, financial writers and commentators look at markers, they try to create an “If Then” causation narrative.
This typically creates a false impression that X caused Y. It is difficult to disprove, because we lack the counter-factual, i.e., where the X event did not occur under the exact same circumstances, and whether Y subsequently occurred anyway.
Bloomberg has a perfect example this morning:
“Federal Reserve Chairman Ben S. Bernanke has succeeded in returning the U.S. economy to growth after the longest contraction in more than six decades. So far Wall Street, not Main Street, has been the primary beneficiary.
Bernanke . . . has helped spark a 62 percent rally in the stock market since March 9 by pledging to keep borrowing costs “exceptionally low” for “an extended period.” His efforts haven’t stopped unemployment from reaching a 26-year high of 10.2 percent in October.
The Fed’s benchmark rate is already near zero and its balance sheet is just below a record at $2.14 trillion, leaving Bernanke, 55, with little room to maneuver. He may be faced with growth that doesn’t generate many new jobs, while stocks keep rising because companies including Caterpillar Inc. and Home Depot Inc. are cutting costs and meeting demand by improving productivity.”
There is no doubt that the Fed chair is a significant player, but to credit him exclusively with an economic recovery and a 62% rally is to fundamentally misunderstand the complexity inherent in these systems.
Further, it denigrates even the possibility, much less the likelihood of an eventual economic recovery and market snapback — regardless of Fed action (See Four Stages of Secular Bear Markets).
We monkeys prefer to find concrete ways to conceptualize what occurs in the economy and the markets, but . . .
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Previously
Confusing Cause & Effect: Elections and Markets (January 9th, 2008)
http://www.ritholtz.com/blog/2008/01/confusing-cause-effect-elections-and-markets/
Correlation (March 9th, 2008)
http://www.ritholtz.com/blog/2009/03/correlation/
Four Stages of Secular Bear Markets
http://www.ritholtz.com/blog/2009/08/aftermath-of-secular-bear-markets/
Source:
Bernanke Lunches on Wall Street as Jobless Rebound Buoys Stocks
Michael McKee and Rich Miller
Nov. 16 (Bloomberg
http://www.bloomberg.com/apps/news?pid=20601109&sid=atHiMqxlVsZY&pos=10
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November 16th, 2009 at 10:39 am
An assumption underlying these kind of statements, which attribute the trajectory of the economy or movements in the stock market to the Fed is that the Fed Funds Target Rate, the target rate for which banks lend their excess reserves to each other, significantly determines market interest rates of a 50 trillion dollar debt market, inflation, and GDP growth of a 14 trillion dollar economy, although there isn’t any hard proof for the presence of such a strong causal relationship between the Fed Funds Target Rate and general market interest rates or the other variables. It’s like believing in the tail wagging the dog. This perception about the alleged all-powerful Fed with respect to the ability to control the economy is shared and supported by the character masks at the Fed itself, though.
Of course, my statement about the underlying unproven assumption regarding the power of the Fed and the Fed Fund Target Rate as controlling parameter for general market interest rates, inflation, GDP growth is also valid for those who attribute the debt bubble and the economic crisis to the Fed and to Greenspan as alleged main culprits, because the Fed Funds Target Rate was allegedly kept too low for too long.
rc
November 16th, 2009 at 10:44 am
The day he announced the QE measures the market began to rally. It removed some of the fear that deleveraging would continue to drag asset values down. JMO
I also think he will need to do more QE before we are out of the woods, but could easily be wrong on this.
November 16th, 2009 at 10:51 am
The rally is created IMO by 2 things. The realisation that financial armageddon is over, and what some would term a credible threat of inflation. While people believe the credible threat, it is a self fulfilling prophecy causing people to buy equities and reduce demand for dollars. Even if no money supply expansion occurs the dollar falls and there is some cost push inflation from the fx rate.
Of course in the current situation it couldn’t possibly work unless the gov is also propping up the money supply.
What will pop it is when the greatly feared inflation doesn’t show up for its appointment while at the same time corporate incomes start sliding after the gains from the lastest round of cost cutting and inventory re stocking is over and people begin to wonder where all the consumers have gone.
At this stage the CBs can no longer threaten inflation with any credibility.
November 16th, 2009 at 10:55 am
…err…isn’t that about the time that the mark-to-market requirements were stopped?
i.e. no more need to liquidate the good stuff so as not to have sell the rotten stuff in order to meet capitalization requirements.
add the QE and off we go…until we don’t
November 16th, 2009 at 11:07 am
i for one have learned a very important lesson during this turbulent time. do not apply objectivity or rationality to a market that doesn’t abide by such parameters. watch what the big boys do. it’s hard to lose when you bet on the rigged horse.
November 16th, 2009 at 11:09 am
$USD down, SPY up. Until $USD down stops being good for stocks.
November 16th, 2009 at 11:12 am
With respect to unproven causal relationships I would like like to point out the rally in the stock markets today, which is partly attributed to today’s released retail sales numbers that allegedly came in better than expected.
Not only that this alleged causality can’t be proven, the claim that the retail sale numbers for October have come in today better than expected is even a misinformation spread in the media. I already have seen this misinformation on Bloomberg, AP, Reuters, CNBC. All claim retail sales were better than expected, although they actually are below expectations. The projections for retail sales were relative to the unrevised decrease of -1.5% in September. The increase of 1.4% in October is relative to the revised decrease of -2.3% in September, instead. That is, to compare expectations to the actual change in retail sales one number would have to be adjusted according to the difference between non-revised and revised retail sales for September. According to Bloomberg, the expectation was for an increase of 0.9% in October relative to the un-revised decrease of -1.5% in September. So the expectation relative to the revised -2.3% in September would have been a 1.7% increase in October, compared to the released 1.4% increase on October.
I wonder whether these journalists at the different news agencies who write up this stuff, are generally just economically and mathematically illiterate, or whether this widespread reporting of misinformation is done intentionally, i.e., lies are spread deliberately by them.
rc
November 16th, 2009 at 11:59 am
one thing fueled this rally. the fed announced to wall street it was going to start monetizing debt. this allowed them to enter the dollar carry trade with absolutely no risk. that is, until that program ended or other events trumped monetization. this isn’t anything new. it’s the same thing the fed did to bail out the japanese economy in the 90s. the world is a very simple place if you allow it to speak to you. complex explanations of a rally or economic recovery as a reason are preposterous. the only reason there is any argument at all as to what is fueling this rally is that people simply don’t understand how the world works. so we get these rational-sounding complex theories of idiocy as to why the market is rallying. it’s pure and simple. liquidity.
November 16th, 2009 at 12:01 pm
Folks: You just don’t get it. These news agencies who “write” this stuff up simply DON’T CARE. The reason is there is NO ONE/ NO ONE with any shred of power, either political or economic power, who is holding them accountable for what they say. Just a few blogs out there in cyber-space talking to themselves. The reason we have this situation is because corporations are behind almost everything that is said and done on the mainstream airwaves.
I bet even Ritholtz, given the necessity would sell his voice to the highest bidder. You see our blogger power and now even the MSM power is diluted by the fact that we have 24hr “news” that is actually nothing but blather, by people who basically just say what they are told. They are all spineless, non-thinking talking heads just saying what they are told to say, on camera. The ones who are actually allowed to say what they think on the air are the mostly the stupidest sheep, put out there because no one with a shred or intelligence could believe their extreme views, and therefore they pose no threat of credibility.
I was cautiously optimistic when those bloggers were invited to the white house for a “chat” a couple of weeks ago, but with their diluted and non_MS views that roughly .005 pecent of the population reads and heeds, are not concentrated enough to cause any political movement whatsoever. The only consolation in the matter is that atr least the Obama whitehouse actually invited them. A Bush administration would have continued to ignore any and all public voices.
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BR: 1) A 3rd party discretely inquired if I was interested in going to the Treasury gig; Like the House testimony, I said no thanks.
2) I’ve turned down 7 figures to sell the blog; Can’t say I would turn down 8 . . .
November 16th, 2009 at 12:03 pm
Sorry I was trying to highlite this statement by RC:
I wonder whether these journalists at the different news agencies who write up this stuff, are generally just economically and mathematically illiterate, or whether this widespread reporting of misinformation is done intentionally, i.e., lies are spread deliberately by them.
It came out as Italicizing the whole post. My bad.
November 16th, 2009 at 12:57 pm
**2) I’ve turned down 7 figures to sell the blog; Can’t say I would turn down 8 . . .**
Everyone has their price I guess, I’d do the same faced with the choice. Makes me long for the days of flower power and hippy culture – they couldn’t be bought – not until they all had mortgages anyway….
November 16th, 2009 at 1:18 pm
http://finance.yahoo.com/news/Bernanke-Fed-will-keep-eye-on-apf-2941100460.html?x=0&sec=topStories&pos=1&asset=&ccode=
Bernanke: Fed will keep eye on sliding dollar
“WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke on Monday said the central bank will keep a close eye on the sliding U.S. dollar even as he pledged anew to keep interest rates at record-lows to nurture the economic recovery.”
…How, pray tell, can you do both these things at the same time? Glad you asked…this is how…
…just a minute, the phone is ringing…I’ll get back to you with the answer in just a sec…
B in T
November 17th, 2009 at 4:40 pm
The problem is a brain thing, we are hard wired to link A happened and the result was what happened next. now that things are more complicated than hitting animals with rocks, we are still hardwired for it, and jump to irrational conclusions for the results in complicated systems.
Then we have to add Chaos into the model.