Thoughts

Bad Day for Highfliers

Stated simply, today was a bad day for the highfliers and a good day for the low-fliers.

Monsanto Off Goldman's Conviction List

The stock stays buy rated, with no estimate or price-target changes.

But, no worries, as we are only three weeks away from QE 2.

Recommended Reading

Run, don't walk, to read Randall Forsyth's 'Coming Full Circle on Monetary Policy' on Barron's online.

IMF Cautions About Worldwide Economic Growth

The IMF has reduced its growth forecast for the U.S.

Global growth will slow sharply as well, according to the report.

This morning, the IMF has reduced its growth forecast for the U.S. to +2.6% in 2010 and +2.3% in 2011. (This compares to prior forecasts of about 3% growth.)

Fed Makes It a Policy to Pump Asset Prices

New York Fed EVP Brian Sack said that Fed balance sheet policy keeps asset prices higher than they would otherwise be.

Despite a market elated, I contend that QE 2 is a one-time event that only creates the appearance of wealth.

It will ultimately prove to be a poor allocation of resources with possible adverse consequences.

Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions.

-- Executive Vice President Federal Reserve Bank of New York Brian Sack

On Monday, Oct., Brian Sack, Executive Vice President of the New York Fed spoke at the 2010 CFA Institute Fixed Income Management Conference, in Newport Beach, California.

The subject of his speech was managing the Fed's balance sheet. The speech is a must-read, specifically as it relates to his statement that Fed balance sheet policy "adds to household wealth by keeping asset prices higher than they otherwise would be."

Yes, he really did say that!

The above quote from Sack speaks volumes and underscores the concerns that I have recently related. Despite a market elated, I contend that QE 2 is a one-time event that only creates the appearance of wealth (read Sack's quote at the beginning of today's opening missive) but will not considerably move the needle and will ultimately prove to be a poor allocation of resources with possible adverse consequences.

"As long as the music is playing, you've got to get up and dance.... We're still dancing."

-- Chuck Prince, Former CEO of Citigroup

For now, the markets violently disagree with me as investors continue to dance to the tune of quantitative easing and its intended inflation of asset prices. But we have seen this party before, back in July 2007, when C's Chuck Prince told the Financial Times that global liquidity was enormous and only a significant disruptive event could create difficulty in the leveraged buyout market.

This is starting to feel like deja vu all over again.

We are in a fragile economic recovery characterized by excess industrial capacity and by a surplus of labor. If we were in a sound and non-jeopardized economy, the Fed would not be having a QE 2 discussion nor would the administration be seeking extreme fiscal solutions.

In my view, we are in a contained recession and containment efforts will continue with QE 2, but the efficacy of the past efforts to stimulate now appear to be waning and the new contemplated strategy of emptying the monetary spigots has an uncertain outcome.

The enthusiasm associated with the Fed's commitment does not preclude a continued fourth-quarter 2010 stock market rally, but the state of our contained recession and the uncertain outcome of QE 2 are likely to limit the scope of any rally.

"We got on 'American Bandstand,' where kids would dance to a record and then rate it. We called ourselves Tom and Jerry. I was Jerry."

-- Paul Simon

From my perch, as the kids used to say on "American Bandstand" when they rated a record, I give QE 2 a 75 '- it's easy to sing along with but hard to dance to.