Financial Over Steering

Looks like Greece is odd country out.  German conditions will not allow it to constantly rework the previous workouts which will be required for it to stay in the EU since it has no viable way to accomplish the austerity measures as currently constructed.  Equity and bond markets are already bloated from the new normal trading strategy; i.e. place monster bets on the Fed/EU put protecting all assets.  The EU portion of the put has about as much behind it as a tooth under a pillow; you will get paid, but will be disappointing on how little.

Common thought now is that any crisis can be avoided by following a few simple steps worked out through a recipe concocted by the Fed during the 2008 financial crisis.  The buy math formula for all sorts of bond instruments is the patch solution.  But like all solutions of grand scale but limited to the best last strategy, a mutation of problems will appear and multiply into a panic of some unpredictable degree.   Over steering leads to dramatic spin.

Notions of Value

No one would argue that the greatest marginal advantage for the bulls this year is being provided once again by the US Federal Reserve.  Reports of outflows from Europe into the US has helped the upside lately but may create an unwanted technical burden to equities.  While the Fed promotes equities via the bond market where it has a direct hand intervening on the cost of money, the door always swings both ways in stocks.  Notions of value and safety are always the last criteria met before a decline.

Some interesting numbers from QRiskValue.  Despite all the claims of market volatility, this year has been the least volatile of the last five and a half years when measured by total range.  From the beginning of the year until last Friday, the S&P 500 total range has been just 160 points compared to last year at this time of just over 300 points.  The last time it was this skinny over same time period was 2007 at just under 200 points.

Market May Have Weak Timbers

Some overbought indicators produced at QRiskValue show only a few times when the market construct was this poor for the S&P500 futures.  October 9th of 2007 (futures 1576), January 24th of 2008,  (1352), July 7th 2011 (1318),  July 27 2012 (1368).

The 2007, 2008  break in the market went to 665.75 in the spot futures, 2011 break to 1068. 

Construct weighs upside potential and current market strength.

More Despair, More Worry, More Buying

The markets never move without the some confusion and important miscalculations but they are always convinced whatever the current direction must be the right direction, at the moment.  EU failure to produce any real substantive economic intervention has put the world markets into end of world mode. But looking at the map, the DJIA and the S&P500 are not far from all time highs and bearish sentiment is on every sign post. We must be at that place they call Going Higher Right Now, Down Later.

Now maybe there will be an event triggered from economic twists no markets can withstand.  But the game being played here is to placate the markets.

Fed intervention to stabilize asset prices has worked in so far as it has inflated financial indexes prices.  This is in part to cover the Fed's inability to stem the downward spiral of new job creation and its ineffectiveness to produce any reasonable economic recovery.

But there are real dangers.  Affecting the balance sheets of banks and providing massive liquidity for lending is much easier than ultimately controlling stock markets which have at their core random movements kicked around by price discovery.  Added volatility resulting from a policy of asset stock inflation works both positively and negatively and up cannot be guaranteed just because a Fed points its finger higher.  Markets are now faced with having to defend speculation in stocks promoted by lower interest rates without the benefit of economic growth.  No jobs, just higher stock prices. 

The Fed and now the EU have created a cloud upon which all financial markets now sit.  With whatever the EU comes up with being probably too thin to save massive red balance sheets, the Fed is locked in.  The Fed believes it has the dominant strategy so that no matter what any of the other players do, it has implemented the correct action.  Clearly the Fed believed things would be improving much more rapidly when it undertook its strategy.  As in any other game, if you are wrong about having the dominate strategy, you lose your defense, and for the Fed that would be asset price protection.