Last week was a very important one. The U.S. Treasury placed a record level of debt, the Federal Reserve announced it would not expand its monetary easing, and we got many top players opining about the economy. In addition, we are facing the uncertainties about ‘
Cap and Trade’ legislation and the healthcare reform. And to cap it all, we are about to close the first half of 2009, with all the consequences in terms of portfolio adjustments that need to take place.
The Treasury debt placement was well received by the markets. We saw these issues amply oversubscribed and trading well after their placement. This was very encouraging. End of the half adjustments also saw a bid coming back into the U.S. dollar. And, with the Federal Reserve issuing a statement in which they are not expanding quantitative easing further, the ghost of hyperinflation is delayed for the time being.
With all the slack in the U.S. economy there is no room for manufacturers to pass cost increases on to consumers. As the fiscal and monetary stimuli become ingrained, this will change. But for the moment, the great fears of a runaway monetary base have been moderated.
This view is also supported by the commentaries of both Warren Buffet and General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt. The oracle of Omaha saw no recovery yet in his numbers. And Buffett’s group holdings are diversified enough, and he and his management team are as well connected enough, to be ahead of any recovery.
Similarly, Immelt commented that the underpinnings for a recovery were in place. And he also observed that China, and some government-driven emerging markets are strong and could be driving U.S. exports. He did mention that the thrust of aircraft engine orders come from abroad rather than the United States.
In this column, we took early and aggressive advantage, starting last October and December, of low market valuations. The market did not price then the strong monetary and fiscal stimuli that were devised to bolster the economy.
Without the Fed’s strong measures and quick actions, we would have fallen into a deflationary spiral and much deeper downturn. But the Fed’s actions normalized markets one by one; starting at the epicenter, the interbank and money markets, and moving outward in concentric circles through mortgages, and student and car loans. These actions helped bring the corporate bond markets and the equity markets back to life.
Stocks appreciated the Fed’s effort, as the market shifted its valuation from an "end-of-the world" scenario to a deep recession scenario or better. But that trade is over.
As Warren Buffet says and Jeff Immelt implicitly recognize, the recovery will take a long time to materialize. There are still huge numbers of homes facing foreclosures, and the slack in the U.S.
