Home About Archives RSS Feed

@theMarket: Economy Sputters, Stocks Stutter

Bill Schmick

The markets were so oversold by Friday that even a hint of positive news was enough to send stocks higher. The trigger was the revision downward of the nation's gross domestic product to 1.6 percent for the second quarter. The initial GDP reading had been 2.4 percent.

"Why is that good news?" asked a perplexed client from Long Island.

"The revision could have been worse," I explained.

Federal Reserve Chief Ben Bernanke also helped push stocks higher by throwing the market a few straws of reassurance. He said he would consider another large scale investment in the markets if the economy deteriorated further or if deflation became a problem. At the same time, he said it might not be necessary because he still sees the economy growing next year.

The Fed has three options to further add liquidity to the system. They could buy more government bonds and possibly mortgage backed securities and drive mortgage rates even lower than they are now. A 30-year, fixed rate mortgage is now below 4.5 percent. In this atmosphere of uncertainty, they could further clarify exactly how long they expect to keep interest rates near zero. To date, they have only said rates would be low for an "extended period."

Finally, they could cut to zero the interest rates the Fed pays banks to park their reserves at the Fed. Right now they are paying 0.25 percent. That might seem a nominal sum to most, but when you have billions of dollars sitting there, that quarter of a percent adds up. This last option, I believe, is the key to getting out of the liquidity trap we find ourselves in.

For the last year and a half, the Federal Reserve has been dumping mountains of money into the financial system, hoping that the banks and corporations will in turn lend it to consumers and use it to hire workers, build new plants and buy equipment. Instead, financial institutions have been hoarding the cash and getting paid by the Fed to do so.

Why? Given the uncertainty of the recovery, the high unemployment rate and the risk of even more bad debts coming through the door, the banks believe it is better to keep the cash then risk losing it on future bad loans or, in the case of corporations, on hiring workers that they won't need in a double-dip recession. Fear is the name of that game.

"Play it safe, after all," they say, "a 0.25 percent return is better than no return at all."

This monumental timidity in the face of 9.5 percent unemployment and a housing market that is tipping precariously back into a downward spiral should be unacceptable to all of us. So how do we get the banks to lend again?

Simple, instead of reducing the rate the Fed is paying to zero, make it minus 1 percent or 2 percent. That's right; in order to park your cash at the Fed instead of lending it out, it's going to cost you. I believe faced with losing 1 to 2 percent on their money or risking it by lending to you and I at 5 to 6 percent, fear will turn to greed. This good ole American financial system will begin to work for us again instead of against us.

In the meantime, we are bouncing around the 1,050 level on the S&P 500 Index. I still maintain that 950 is in the cards. It's simply a matter of time before that occurs. I know this five-month trading range is frustrating to investors but patience will be rewarded, possibly as soon as September. The doom and gloom is building but has not yet built to a crescendo. We may well get another bounce this coming week but once again it will be on low volume and will simply be another bear trap, so don't be fooled.

1 Comments
Tags: stocks, GDP      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Bohemian Road Opens on Historic Eagle Street
North Adams Traffic Commission Advises Raising Parking Permit Rates
Crane Stationery Reinvesting in Rebranding, Workforce
New Associate Provider Joins SVMC Urology
Local Wealth Adviser Named to List of Best-in-State
Williams College Senior Wins Carnegie Junior Fellowship
Local Entrepreneurs Complete 1Berkshire Get Mentored Program
BCC Names New Director of Human Resources
What Should You Do With an Inheritance?
Cultural Pittsfield This Week: March 22-28

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (284)
Independent Investor (388)
Archives:
March 2019 (6)
March 2018 (3)
February 2019 (6)
January 2019 (6)
December 2018 (4)
November 2018 (9)
October 2018 (5)
September 2018 (4)
August 2018 (9)
July 2018 (2)
June 2018 (8)
May 2018 (8)
April 2018 (7)
Tags:
Housing Selloff Election Debt Bailout Deficit Interest Rates Stocks Currency Crisis Jobs Taxes Markets Federal Reserve Economy Congress Banks Energy Euro Europe Fiscal Cliff Stock Market Wall Street Commodities Europe Stimulus Recession Rally Japan Metals Greece Retirement Pullback Oil Debt Ceiling
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Does the Fed Know Something We Don't?
The Independent Investor: Will Pot Stocks Go Up in Smoke?
The Independent Investor: Does Our Debt Really Matter?
@theMarket: Pick Your Poison
The Independent Investor: A Nation United in Debt
@theMarket: Stocks on Hold
The Independent Investor: Veterans on Receiving End of Trump Administration
The Independent Investor: Economic Prosperity in the United States
@theMarket: Markets Gain on Hope & a Prayer
The Independent Investor: Trump's War on Drug (Prices)