Good News is Bad News: The New Paradigm

by on November 7, 2013 7:46 pm BST

The United States showed gross-domestic product figures that exceeded expectations nearing three percent with a print at 2.8 percent. This beat the two percent expectations, and the previous quarter’s growth that was upward revised to 2.5 percent from 1.7 percent. Recent manufacturing data, both regionally and data included in the Institute of Supply Management (ISM) indicators, show that there have been recent gains. The labor market is stagnant, but it is basically neutral when considering the gains during the firs six months of the year.

All this positive data should be good for the markets, right? Wrong!

When I see both equities and precious metals fall dramatically on good data, this signals one thing: the market is worried about a taper in monetary easing from the Federal Reserve within the next few months. Earlier this month, the Federal Reserve remained optimistic on the outlook of the economic data which may indicate a taper soon. The US economy is not where it needs do be, but it might be tapped out in regards to the Fed’s influence on the economy outside of equities. I actually agree with Fed chairmen Ben Bernanke, it is now time with the political nonsense to stop and focus on fiscal policy to further garner growth. Not to mention, we are talking about a taper and not a cold-turkey cut off.

“You had some good economic news today and we’ll see what the payrolls numbers are tomorrow. The fear is that with better-than-expected economic numbers, tapering will commence sooner rather than later,” Bryn Mawr of Trust Co. said. We have been in this state of quandary where the new paradigm is to hope for poor data because Federal Reserve liquidity is good for equities.

As one Bank of America analyst said “the markets are getting frothy, man.” And they are. Even with today’s 19 point drop, the Standard & Poors index is up 407 points since the yearly low made on November 16, 2012. It’s up roughly 325 points since January 1. The billions in mortgage back security purchases also propped the housing market up into bubble territory as housing prices climbed to five year highs, making it less affordable for continued buying that is needed to continue the trend. Perhaps, a Fed taper may reduce the likelihood of another financial crisis as everyone piles into equities. A bit of pain to the downside could make “us” stronger over the long-run.

The general consensus is that the Federal Reserve will taper in March with a small fraction of optimistic taper-ists see a reduction in December. The sooner the better, so the markets can throw a child-like temper tantrum now when candy is taken away and move on to bigger and better things.

A taper from the Fed will then tell Washington D.C. to get their act together because this massive QE program cannot last forever. However, hoping for political progress is not encouraging in the least.