No Harm Done

Many were expecting something good to come from Chairman Bernanke at Jackson Hole. His speech was the most widely speculated that we had seen in years. After all, was he going to set the tone for another round of bond purchases, which like in 2010 would force a re-allocation of capital towards risk assets, or throw cold water on the idea? We really got neither, more or less a reiteration of last month’s Fed meeting. That was the best scenario, and after the markets sold off on some early dislike it rallied furiously to finish the day near its highs. I had been saying for weeks that we would get very little ‘new’ from the Chairman. To say nothing, do nothing – means there is no reason to panic. The markets rally this week was an impressive 4%, putting near the twin monster moves higher during ‘debt downgrade week’.

Removing Uncertainty is a GOOD Thing

Markets just hate uncertainty. When it’s there the first response is the reach for protection. When you are not clear of an outcome and you have assets at risk the options are clear – sell and come back another day or buy protection. For this reason the VIX rose sharply to levels not seen in over two years. Good reason for this: how was the debt ceiling crisis going to be resolved? How about the consequences of a debt downgrade? Earnings have been less-than-stellar this month, and then there was angst about the Fed and future monetary policy. Let’s not forget about the troubles in Europe (more on that below). As these uncertainties are peeled away the fear level subsides. Some may have been dissatisfied with Bernanke’s speech Friday, yet the VIX dropped sharply – after rising 10% it closed down 10% – and there you have it. There is no doubt more uncertainty and issues to resolve but for now the fear is slowly being removed. A trend down in volatility would be good for stocks. Gold continues to shine, so we may not have seen the entire removal of fear. However, this new Hurricane Irene could wallop the east-coast and businesses may suffer – this is not priced in.

Maybe The Economy is Not So Bad – In the US, not Europe

Back in 2009 Chairman Bernanke was quoted as saying he saw ‘green shoots’ in the vast wasteland of a devastated economy. The 2008 recession spared no sector – everything was hit, even gold and oil. But the recovery was spotted early and with a boost from fiscal and monetary policy the US economy made its way to higher ground. All is not great now of course, with issues such as higher debt, slowing growth, global economic crises, and political impotence, we continue to muddle our way through. Growth is lethargic, less than 1% in the first half with a bit of inflation. The second half looks less encouraging but the good news is there are some signs of stabilization. Sentiment and business conditions have come in very negatively, but industrial production and durable goods portray some positives, along with reduced jobless claims and moderately strong retail sales. Europe on the other hand continues to show bad numbers – for example a few weeks back Germany’s GDP was a disappointing, hence the DAX is down 28% for the month alone! Uncertainty remains over how best to handle the struggling economies of Greece, Italy, Spain, Portugal and Ireland. That dark cloud is also holding back markets and keepingfear levels elevated.


Bob Lang