The US economic recovery is really at a crossroads in terms of which direction it will head next. With asset prices so artificially skewed from their fundamental values, every pullback in the markets has investor’s questioning whether we are witnessing that inevitable correction, or this bull market in equities just continues. The uncertainty plaguing investors is whether the real economy is able to catch up with this frankly unbelievable run on which these stock markets have gone. And job numbers in the US were once again stable and mediocre. They weren’t amazing, but they weren’t that bad either.
Of course the employment situation in the US really is the foremost important economic indicator, and for the numbers not to be negative, as many were cautiously expecting, has given markets reason to trade higher to finish the week. But the inevitable question remains, can the real economy take over from how spectacular equities are priced in this one that’s artificial.
After continued buying into the month of May, stocks suddenly appear to be indecisive. US equity indices altered between positive and negative trading sessions over the past week and a half. US Treasuries on the other hand, have had their worst month in May since December of 2010. As of late, there has been a shift in the sentiment of the markets that does raise some caution for investors. The problem is that investors have not been paid enough for the risk they incur in other areas of the market. And that is absolutely the paramount concern of the effects of the record stimulus that has been added to these markets.
Central bankers all over the world are aware that mispricing credit jeopardizes the longevity of this economic recovery. But as we see bond yields starting to once again creep higher or equities doing a seesaw, the markets have stepped away from reality and how they will come back into balance is the greatest question of this period in time. Many analysts stand ready to criticize the world’s central bankers before this experiment is even finished. The truth of the matter, as I cannot restate enough, is we do not know how it will finish. But it is simply too early to judge the efforts of Bernanke and the Fed because macroeconomic policy is intended for the long term.
Very much like Paul Volcker in the 1980’s, the central of bankers of today as well risk their creditability in the policy they opt to implement. There were just as many naysayers of the US central bank when Paul Volcker went to war against rising prices and correspondingly raised interest rates in order to tackle rampant inflation. Same too with what we see with the US Fed and this massive expansion of the monetary base in order to ensure the liquidity of the world’s financial markets.
Never has a central banker really been as exciting as markets are so keen to move so decisively off of the latest policy announcement or testimony before a central government. The problem is that these movements have become so erratic that the investor does not know which direction in this current cycle the market is going to take.