The Fed Three-Peats (IWM, RWM, SDS, SPXU)

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February 10, 2012 1:11pm NYSE:IWM NYSE:RWM

The Daily Capitalist:  Oops!  They’ve done it again.  Maybe. Here’s the evidence that the Fed aborted a mini-recession with Operation Twist, which in association with enlarging its balance sheet by reinvesting dividends from its mortgage-backed securities portfolio was essentially the QE 3 that Jeff

Harding had been predicting months earlier.  Cleverly, though, they and the media didn’t call it QE.  But it had a similar goal and was achieved by Fed intervention in the markets.  I’ll call it QE in the real world.  Here’s some of the evidence that a brief economic cycle has come and is, perhaps, gone or going.  First, from Gallup:

Gallup Economic Confidence Index -- Monthly Averages

Next, also from Gallup:

Trend: Wells Fargo/Gallup Small Business Index -- Future Jobs Expectations

Finally, a stock chart, that of the Russell 2000 [ETF’s stock symbol = (NYSEArca:IWM)], which is the most domestically-oriented of the major U.S. indices:

Chart foriShares Russell 2000 Index (IWM)

What my eye sees from the above and other data is that the moral equivalent of recession has come and, the stock market “thinks”, gone.

The IWM had a full-fledged bear market, dropping roughly 25% from peak to trough.  This approximates the average peak-to-trough stock market drop of 30% seen in an average recession.  The first chart above shows a huge drop in consumer confidence, typical not of recoveries but recessions.  Going from -21 to -56 is no small (negative) achievement.  This sentiment drop was mirrored by a worsening of the Bloomberg Consumer Comfort Index to new all-time lows, even below the lows of 2009 on a sustained basis.  Copper, oil, platinum, cotton, silver, etc., had significant bear markets, all off well more than 20% peak-to-trough.  Even gold came vanishingly close to a 20% drop.  Interest rates plummeted after QE2 ended, so that drop had nothing to do with Fed manipulation.  Dow Chemical reported a huge 4% volume drop in Q4 for North America, presumably mirroring the U.S. volume drop.  Companies missed analysts’ expectations by worse margins even than in the teeth of the Great Recession.

To me that all spells recession.  A mini-one, but, I’m thinking, in effect a recession.  Whether it eventually is determined to be (have been) one, of course I can’t know, and I have the luxury of being neither an economist nor a business cycle expert, so my guess is as (in)valid as anyone’s.  But we all should remember that NBER did not determine the Great Recession’s start point, which was December 2007, until a full year later.

What is the common denominator between the recoveries from the Great Recession, the slowdown into summer 2010, and last year’s event of intermediate severity?

QE 1, QE 1.5-2, and QE 3 (aka Operation Twist + emergency loans to the European Central Bank, etc.).

The good news that I see is exemplified by the middle chart above.  Look at the trend in the “decrease” jobs (green) line.  It’s broken to a new cyclical low.

What’s the bad news?  There’s no evidence that the economy can win the future absent Federal Reserve monetary injections.  So in that sense, the Great Recession can not be clearly said to have ended for real.

We will just have to see what happens the next time the Fed takes the training wheels off the bike.

I don’t envy Ben Bernanke his task.  He is guiding the economy along a narrow open-air tightrope with recession if he falls one way and significant price inflation if he falls the other.  Plus, visibility is limited.  And it’s windy.  (Of course, why one man and one committee should have so much power is a different matter.)

Does he ever wonder why he’s doing this for government wages, when he could have a much easier life while enjoying a higher current income if he were back at Princeton (or a much higher income on the Street)?

Related: ProShares UltraShort S&P 500 ETF (NYSEArca:SDS),  ProShares UltraPro Short S&P 500 ETF (NYSEArca:SPXU), ProShares Short Russell 2000 ETF (NYSEArca:RWM).

I’ll discuss investment thoughts in a follow-up post.

Written By DoctoRx From The Daily Capitalist

The Daily Capitalist comments on economics, politics, and finance  from a free market perspective. We try to present fresh ideas the reader would not find in contemporary media. We like to call it “unconventional wisdom.” Our main influences are from the Austrian School of economics. Among its leading thinkers are Carl Menger, Ludwig  von Mises, Friedrich von Hayek, and Murray Rothbard. There are many practitioners of this school today and some of their blogs are shown on the blogroll. We trace our political philosophy back to Edmund Burke, David Hume, John Locke, and Thomas Jefferson, to name a few.

Our goal is to challenge contemporary economic thinking, mainly from those who promote Keynesian economics (almost everyone) and those who rely on statist solutions to problems. We apply Austrian theory economics to investments, finance, investment risk, and the business cycle. We have found that our view has been superior in analyzing and understanding economic and market forces. We don’t consider ourselves Democrats or Republicans, right wing or left wing. But rather we seek to  promote free markets and political freedom.

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