Tuesday, August 23, 2011

Psychology Returns to 2009, 2010 when Bad News = Good News Because it Means Intervention

This morning we have seen another two very poor economic reports - new home sales (no surprise there), and the Richmond Fed.  However the market is rallying.  Why?  Well for one, we are extremely oversold - but we've been oversold many days the past month and not seen a rally.  More importantly, we appear to have returned to the psychology of 2009 and 2010 - that is, bad news = good news because it means intervention of the central bank or federal government kind.  Hence, the worse the news, the more said news forces someone's hand, however reluctantly.

It's perverse but it worked wonders in 2009 and 2010.

In terms of news, like the Philly Fed, the Richmond Fed reading disappointed at -10 (vs -5 expectation and -1 July), the worse reading since June 2009.  Usually this Fed gauges are not that well followed, but right now every little piece of data is being analyzed to decipher where the U.S. economy stands.

New home sales are a disaster at under 300K but not even worth talking about.  Existing home sales are >90% of the market, and came in horrid last week and until they rebound, new home sales are an afterthought.


The Fed's Bullard is out this morning with comments that the speculators also like; however please note there is an inflation indicator in there, so one would think the Fed needs at least 1-2 weaker readings on the inflation front before it moves onto the next step of desperation:

  • The Federal Reserve will take action if the economy weakens substantially and deflation reappears, a senior Fed official said in an interview with Japan's Nikkei business daily published on Tuesday.  St. Louis Fed President James Bullard said he would support action if that occurred.
  • "If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action," Bullard told the Nikkei.
  • Bullard also said the Fed has already implemented a very easy monetary policy and the inflation risk has increased in the United States.
  • The head of the St. Louis branch does not have a vote on the policy-setting FOMC this year.

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