In the spirit of full disclosure, I was in the camp that thought Ben Bernanke would move to full QE right away. But the facts are just such so this my take on them.
From a tactical point of view (as in relative to what he may need to do later) this is good news. He is stating his concern. He is not in panic (at least publicly), and he talks about having more tools if needed. This means 'I will do something if the market drops'. I think his level is 1050/1000 on the S&P 500, then he will be back in force stimulating.
He gains some credibility by focusing on the US debt level and that it’s solution is fiscal plans. He is using classic economic theory that when in a liquidity/debt trap the only real way to gain growth is through fiscal stimulus such as tax breaks, job incentives and other forms of reallocation of investments.
He also directly moves “the ball” over to the US Congress and their need to react to the debt situation. This is good for markets and probably the best news of this speech. It plays to the political theory that the best growth conditions are created through the inability of the political establishment to conduct any form of policy. Think about President Clinton. He came in with major political program but ended up doing... Nothing. Then as a byproduct came growth, a fiscal SURPLUS and earnings. This is the good news.
The “negative news” is that most people had looked for specific targeted help to the mortgage sector through the Fed buying more mortgage bonds. This would have helped the banks that are under pressure, such as Bank of America, by taking risk off their books. This is now delayed, at least temporarily.
Bernanke's position is no different from the ECB, which also feels European fiscal policy needs to play a greater role if the debt crisis is to be resolved. This is a small step for mankind, as we did not get more. 'Extend-and-pretend' for now.
From an equity market perspective, I stick to my theory of a small up-move in risk before final 5th leg down. Being long here, of course, is a risk. I have with the help of Mr. Mads Koefoed, our macro strategist, constructed a “likely” scenario for the S&P over the next three months in order to be totally rudderless.
Source: Bloomberg LLP and Saxo Bank
The chart uses the recent low in the market in early August and then projects the future moves in S&P by using a 2008 analogy. This leads to the chart indicating we will move up into late September and then we will start towards a new low in the end of December/Early January.
This is of course not a precise science, but only a reference tool.
Finally, we are presently working on Q4 forecasts and I expect to have two major changes:
- We will adjust our GDP forecast for the US higher relative to consensus based on our leading indicators, which show massive improvement in consumer spending (some of it due to much lower gasoline prices). This also plays to my number one rule of economic projections, namely mean reversion. We were negative on US growth all year and were right. Now we are moving to the opposite, being more positive than the consensus, which is (extremely) low.
- We will start focusing on how the US Dollar may stand up in front of a major strength period which will be based on the US's increase in competitiveness.
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