Everyone Will Be Debating The WSJ Story About The Fed Considering Ways To End QE

Everyone Will Be Debating The WSJ Story About The Fed Considering Ways To End QE

Joe Weisenthal | May 12, 2013, 7:22 PM | 2,992 | 16

Futures are down modestly in early Sunday trading, and one possibility for that is the story that came out after the bell on Friday in the Wall Street Journal from Fed whisperer Jon Hilsnerath titled Fed Maps Exit From Stimulus. The gist: The Fed is seriously thinking about how it might begin the QE wind-down process. Given the widespread belief that Fed stimulus is a major tailwind for the market, talk of QE wind-down is invariably something of a negative. In tonight’s “Closing Print” note, Mike O’Rourke from JonesTrading thinks the article’s existence is pretty significant.

He writes:

The WSJ’s Jon Hilsenrath published a story Friday evening titled “Fed Maps Exit From Stimulus – Timing of Wind-Down Is Uncertain, but Focus Is on Managing Unpredictable Market Expectations.”  We suspect the twitter taper caper on Thursday opened the window for the FOMC to provide some clarity as to where policy stands.  Here are some key questions.  Is this story important?  Can it be taken at face value and should markets move?  The answer is yes, yes and yes.  The WSJ placed the article prominently on the cover of the Saturday edition, so they believe they have an important story.  It is a Hilsenrath story, and in the post-recession QE era the Fed has used him to foreshadow almost every major monetary policy move. Finally, in a tape where QE is the dominant theme, any indication of policy slowing or reversing course is meaningful. We think the headline in and of itself is interesting “… Focus Is on Managing Unpredictable Market Expectations.” Are market expectations really highly unpredictable? Has this Fed done anything done but promise excessive monetary support for the US economy? The market only expects what the Federal Reserve has conditioned it to expect. Nearly every time the stock market dipped over the past 3 years, a new asset purchase program was launched. We view “unpredictable market expectations” as a sign that the FOMC has been trying to foreshadow policy in one direction and the market is interpreting it in another direction.

Lest you think, however, that talk of a Fed wind-down is guaranteed bad news for the market, we’d urge you to check out the latest post from Mark Dow, who argues that those expecting a meaningful fall just because the Fed removes the training wheels are liable to be sorely mistaken.

Again, it is important to underscore that it is the indirect psychological effects from Fed support and the low cost of capital—not the popularly imagined injection of Fed liquidity into stock markets—that have gotten investors to mobilize their idle cash from money market accounts, increase margin, and take financial risk. It is our money, not the Fed’s, that’s driving this rally. Ironically, if we all understood monetary policy better, the Fed’s policies would be working far less well. Thank God for small favors.

This is not a semantic point. I can hear traders saying “yeah, whatever, who cares, don’t fight the Fed, just buy”. But this concept has huge implications for the phase where the Fed decides to remove the training wheels. If the Fed money is not directly propping up the stock market and the economy underneath has been healing, the much talked about wedge between “Fed-induced valuations” and “the fundamentals” is likely considerably smaller than the consensus seems to think. It’s less “artificial”. In short, what all this means is the day the Fed lets up off the gas might give us a blip, or maybe that long-awaited correction, but ultimately the Policy Bears will end up getting crushed, again.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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