Talk Therapy boost US Markets

Again US stocks reportedly rose on chatters of the US Federal Reserve rescue.

From Bloomberg,

U.S. stocks advanced, erasing a weekly loss for the Standard & Poor’s 500 Index, amid reports policy makers may take steps to assist economies battered by Europe’s sovereign debt crisis…

Stocks extended gains today amid reports of plans by central banks. Bloomberg News reported that U.K. Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit. Reuters said that central banks are prepared to take action if needed to boost liquidity in financial markets if the Greek elections cause tumultuous trading, citing officials linked to the Group of 20 nations.

Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.

‘Good Stage’

“Good inflation data and weak employment is a good stage for a Fed policy response,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in an e-mail. “We are at the stage where bad news is good news in terms of a policy response. Jobs will be the critical factor that influences the Fed.”

Imagine “bad news-is-good news” because of the prospects of rescues? That’s how distorted markets are today. Yet until what point will the market simply imbue all talks, with no actions? This is simply addiction.

And because the Fed’s talk therapy (signaling channel) seems have accomplished more than the implemented policies of QEs or Operation Twist, indecision or policy procrastination maybe a (deliberate) decision.

Bloomberg columnist Caroline Baum explains, (bold emphasis mine)

All it took was a lousy employment report and news that Spain’s banks were in the ICU to slice the yield on the 10-year Treasury note to a record low of 1.43 percent on June 1, a 30-basis-point decline for the week. The market accomplished in a matter of days what the Fed couldn’t in nine months and $400 billion of curve-twisting operations.

I suspect we are two events away from a 1 percent yield on the 10-year note and a flatter curve. All it would take is another weak employment report and a Greek exit from the euro zone to send investors rushing for the safety and security of U.S. Treasuries. And no, those buyers aren’t expecting to earn a positive return during the next 10 years.

Compromised Compass

In the old days, the spread provided a timely reading on the economy’s health by juxtaposing a Fed-pegged short-term rate with a market-determined long-term rate. The market rate served as a kind of check on Fed policy.. Why would the Fed want to compromise a good compass and reduce the incentive for banks to lend?

The argument for additional curve-twisting rests on the idea that lowering long-term Treasury yields brings down mortgage rates and helps the ailing housing sector. Freddie Mac’s 30-year commitment rate fell to a record low of 3.67 percent last week. It’s not the rate that’s deterring home purchases; it’s the lenders, having wisely determined that a good credit score and a 20 percent down payment are important after all. Not to mention potential buyers’ fears that home prices may fall further.

If Bernanke isn’t convinced of the need for more QE just yet and twisting the yield curve is cosmetic, what else could the Fed do at the conclusion of the June 19-20 meeting? More talk therapy.

"Bad news-is-good news" because the FED believes or thinks that they can continually talk up the markets.

Yet promises alone cannot satisfy the cravings of addicts (of anything).

And rising markets based on talk therapy looks likely indeed a candidate for “two events away from a 1 percent yield on the 10-year note”, that’s euphemism for a crash.

The more the market rises on the FED’s talk therapy, the greater the risks of a Dr. Marc Faber event.

Be very careful out there.