Insights & Advice

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The Case for More Stimulus is building

It is that time of the year when all eyes turn to the Fed. The economy is slowing once again and the junkies on Wall Street are jonesing for their annual stimulus fix. It looks like they are going to get one.

Investors need their fix

Until recently, the anguished cries of investors to “do something” about our slowing economy have gone unheard by Chairman Ben Bernanke of the Federal Reserve Board. However, this week in his semiannual testimony before the Senate Banking Committee, he did admit that the economy was once again slowing.

U.S. data on Thursday underscored his statement. Factory orders contracted in July for a third straight month while new claims for jobless aid surged last week and home resales slumped to their lowest level in eight months in June. Consumer spending is dropping off, businesses are getting increasing gun-shy about investing in new machines and computers and most economists now expect that this year’s second quarter growth will fall well shy of the first quarter’s weak 1.9% growth rate.

About the only light in this darkening economic sky is coming from the housing sector, of all places. Home construction leaped 6.9% in June. Most experts expect housing construction overall to increase this year by less than 1%, but it is still better than the string of declines we have experienced since the financial crisis. However, housing alone cannot save our economy, especially when home owners in many regions are still experiencing declines in the value of their properties.

I have argued that those who were betting on another quantitative easing “any day now” were going to be disappointed. My belief is that the economy had to show signs of real slowing before the Fed would act. Only now is the economic data staring to exhibit the same level of declines we saw last summer just prior to Fed’s announcement of ‘Operation Twist’ last August.

The Federal Reserve’s Chairman Bernanke could announce an easing at any time, although he normally waits for a scheduled Fed meeting to do so. The earliest date in which the Fed could announce further easing efforts to stimulate the economy is their regular FOMC meeting, which occurs on July 31 through August 1.  Another possibility is to wait until later in the month and announce something at their annual Economic Policy Symposium in Jackson Hole, Wyoming.

Clearly, the stock markets are anticipating that easing announcement. It is the fuel that is feeding this summer rally. So far every dip has been met with buying and although markets remain volatile, the trend is still up. I explained in my recent column “Bad News is Good News” that as the economic data continues to disappoint and the economy weakens the probability that another easing is just around the corner rises.  QE has been good for the stock markets and investors, like addicts, we are conditioned to expect these yearly stimulus injections by the Fed.

The exact timing matters much less to me than whether or not another quantitative easing will do anything more than give investors a free ride in the stock market. Interest rates are at already historically low rates.  Dropping them further, in my opinion, is not going to do the job. At most, the past moves by the Fed have created what I call this start and stop economy. Here’s hoping that this time the Fed does something different that can truly make a difference. Otherwise, the relief rally could be short-lived.

Posted in A Few Dollars More, At the Market