But don't take the January Effect Indicator as the be all and end all for predicting the stock market trajectory, because for the last two decades the indicator has not been successful in calling the outcome.
Nevertheless, the January Effect Indicator might be accurate this year, as there are a number of fundamental reasons to believe that 2015 might be a bear market, provided that we see no fed intervention. The consensus on the Street is that the US economy will grow by three percent this year and that the Fed is likely to raise rates sometime in the middle of 2015.
But the consensus might be out of kilter with what actually happens going forward.
Why?
Last year saw the Fed wind-down its largest trillion dollar fiscal stimulus program in history. The monetary authorities use every tool in their kit, from massive quantitative easing (QE) program to near zero interest rates, yet the needle hardly moved. Despite pumping the system with liquidity and keeping interest rates at historic lows, the US economy only registered a 2.4 percent growth.
We now know the effects of QE. It has very little or no impact on the real economy. What it does do however, is inflate asset prices, inflating equity and bond prices and create real estate bubbles at the expense of everything else.
That has an impact on Gross Domestic Price figures which creates an illusion of a recovery. But it’s a phoney recovery and the reason why the man in the Street doesn't feel better off.
An inquisitive mind would be looking back at the trillions spent on QE, the purchasing of assets by the Fed and be wondering, with all that money being used to stimulate the economy, (that's what mainstream keep selling) why austerity is necessary. It doesn't make sense, something smells fishy and you don't need to be an economist to understand that.
Let me put some flesh on the bones or the recovery spin story.
Take a look at US GDP, which was marginally better in 2013 to 2014, when it went from 2.2 to 2.4 percent. Considering the Fed threw the kitchen sink at the economy during this period, that really isn't much of an improvement in the growth figure.
However, one good piece of news is that unemployment during that period did indeed plunge, but strangely enough it really didn't do much for GDP (during that same period), which registered only a measly 0.2 percent increase.
So an obvious question you might be pondering is; why didn't that massive reduction in unemployment lift GDP by an equally impressive amount?
What we saw during that period was just a reduction in the unemployment rate. The data doesn't include the long term unemployed, so when people quit looking for a job they don't show up in the unemployment data. Put another way, the long term unemployed have been mathematically eliminated from the system. Furthermore, the jobs being created in the economy were not well paying full time work. If the recovery story was credible, we’d be seeing unemployment fall and a decent GDP rise, but that is not happening.
My question is; how could the consensus view, that the US economy will grow by 3 percent this year, hold water bearing in mind that the massive QE programme and near zero interest rates resulted in a growth rate of 2.4 percent? The very same pundits estimate that interest rates will rise sometime mid-year. Therefore, in a higher interest rate environment with no QE to create an illusion of growth, where will this growth come from?
Moreover, the collapse in the super cycle commodity prices and oil price has resulted in a cut in infrastructure spending around the globe and to top it all off there has been a string of disappointing bellwether earnings.
It wouldn't surprise me if we get US growth downgraded soon.
In view of the economic reality, it would seem unlikely that the Fed would raise rates in 2015.
Perhaps we have more chance of seeing another round of QE, maybe QE4. After all, what else can the Fed do when the illusion wears off and stocks start heading south? With interest rates held already low for an historic period, the only tool left in the kit is QE.
But the monetary authorities will try and find an excuse to bring QE to the rescue, as they can't blame the deteriorating economic prospects on a failed economic policy. So they may blame the problem on a dollar crisis, or problems in Europe, the slowing world economy, or even that inflation is too low.
However, more QE isn't the solution, it may be part of the problem.
Although having said that there is one obvious positive for another round of QE from the fed, that it would depreciate the US dollar and that would be most welcomed by US exporters.
If we did see another round of Fed QE, it would end the US dollar rally and do more of the same, blowing more air into equities and bonds. It might also spur on carry trades and that could boost emerging currencies too.
Time will tell.
0 comments:
Post a Comment