Tuesday, August 09, 2011

Disaster averted. Rally on!

Well, that was interesting. About midnight last night it was clear that the global markets were turned onto the rumor that the Fed was going to save the day with some grand policy statement. The expectations were some comments about a further easing and maybe even a hint at the size of the program.

The US market was up sharply at the start of the day, but that confidence seemed to fade as we headed toward the actual Fed announcement. Once that press release hit the wire, I had the same reaction as the market: What, that's it? All of the major indexes quickly dipped into the red and it looked like the rout was about to begin.

However, Goldman rode in on a White Horse to claim that the vague wording which included different "policies" that may be available was actually code for the "Fed free money train is back in business". With 3 dissenting votes (the most since 1992) I don't see how anyone reaches this conclusion but this was all the market needed to hear and it was off to the races.

In effect, the Fed told us today that they expect the US economy to be weak for the next 2 years, possibly even slipping into a recession. When S&P said our political leadership, debt burden and weak outlook meant a downgrade the market tanks and the White House calls them irresponsible. When the Fed says the economy has weakened substantially and that it may stay that way until 2013 the market has it's biggest rally in 2 years.

Long-time readers will remember the wild ups and downs in 2008 when the market had huge swings on little or no concrete news. This feels so much like 2008 it is scary.

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