Wall Street in Flip-Flops...Again

I have written before that I sometimes find the folks on Wall Street to be a comedy of sorts. Today I have this same sentiment based on the news on the Street that today ended a four-day rally because, of all things, the folks on Wall Street were frazzled that just maybe the economy is weaker than they thought.

Just yesterday the DOW rallied triple digits on the news that Larry Summers would not be in contention to be the replacement for current Fed Chairman Ben Bernanke. Instead it looks more likely that Janet Yallen will replace him. If Larry Summers would have been the top successor he would likely have decided to taper the bond buying program currently in place by the Fed. Janet Yallen, however, is more likely to continue it.

To the folks on Wall Street this came as a relief yesterday. Thus the rally.

But, and I have said this before, tapering would in fact be a stronger economic development than not tapering. So what's the surprise on the street that the economy is not as strong as anyone thought?

One word. Duh. That is why quantitative easing is currently the position of the Fed. It is because the belief is by the Fed that the economy needs to be artificially propped up. It needs to be stimulated by low interest rates, and the bond buying program helps to accomplish that.

Perhaps I am missing something, but my take is that tapering should actually have the effect on the markets, that quantitative easing continuing seems to have had originally. The markets, and their underlying businesses would have a much better shot at gains and growth if more Americans are working, more Americans are spending, and when consumer confidence shows signs of improving. All of these things are lacking, thus the Fed continues to see quantitative easing as a means to hold things up in the interim. That is inherently a sign that the economy is weaker.

Still, I don't think today's move really means much. I just felt an urge to state the comedy of it. Yesterday the Street jumped for joy that the economy was crappy enough to warrant continuing easing. Today they sold off because they felt the economy was the obvious same level of crappy enough it was yesterday to hurt their investments.

It just leaves me scratching my head is all.

Sharp Decline In Markets an Overreaction

If you are a fundamental investor, today's sharp decline following comments by Fed Chairman Ben Bernanke that the Fed will not change its current plan to buy bonds and continue to print money, should be taken with a grain of salt. This is largely because the Fed was also upbeat, for the most part on their overall projections of the economy, saying much the same thing they said in May about where they thought things were going.

I would take this as a signal that the Fed believes that the market is on track to meet or exceed projections, but it is still a wait and see game.

I do not like the idea that the Fed wants to continue to print money since this leads to dilution when it comes to how much a dollar happens to be worth, and I think there could have been many more, more effective policy issues that could have curtailed the perceived need by the Fed to prop up the economy through its efforts. But barring that, and of course the Obama administration has only engaged in policies that are frankly, in my opinion, negative toward the prospect of real growth, I don't really believe that the Fed was left with much else of a choice.

My reaction to Wall Street's reaction is that it was an overreaction. And this is something I see as an opportunity to buy more shares of great companies at a discount. The fundamentals of the markets continue to be strong, even if the economy is still lagging, almost staggering behind.

What I drew from Bernanke's remarks is that the Fed will continue on it's current path until such time that some of the projections get closer to becoming foreseeable as becoming true. But to pull the plug too early is perhaps not the best plan...

Especially considering the slow growth we've seen in this recovery, and the fact that, so far as I can tell, Obama has no good policy decisions forthcoming that will speed things up at all. In fact, there may still be some heavy weights put on the economy, especially as Obamacare begins to get closer to full implementation.

Despite today's sharp decline I am bullish on the markets, and I am bullish on the economy as well. I don't expect anything robust economically speaking. But that's the point. I am certain that the economy will continue slowly, very slowly upward. At some point the Fed will leave go of the reigns and allow more natural forces to work. Again, nothing robust. But whatever growth will come more naturally. I think that's a positive. It also, for me, gives a sense of certainty, the counter of which is negative to the markets. I am comfortable with slower growth, because I can see that's the direction. If the economy gets closer to projections, I am confident that Bernanke will leave go of the training wheels, and let the economy do its own thing on its own terms.