With the end of quantitative easing due to take place next month, reality may once again have an impact on financial markets.
Since QE began more than five years ago, markets have soared on bad news and dropped on good news. That’s because investors believed that bad news would prolong QE and good news would make it unnecessary.
And there’s been enough bad news over the past five years for the stock market to repeatedly surge to new record levels.
With QE ending in the U.S., but probably soon beginning in Europe, the Federal Reserve Board needs a different tool to manipulate the markets. While Chairman Janet Yellen and others have been talking about “macroprudential supervision” as the next step, that line is selling like old fish, because no one has explained what Ms. Yellen means by “macroprudential supervision.”
The good news is that good news should finally be good news. Fundamental performance and economic recovery should mean something again.
The bad news is that there is plenty of bad news. Consider a few lowlights:
- Unemployment remains a problem, as jobless claims are rising (see chart). New jobless claims reached 315,000 last week, which is their highest level since June. They are also higher than they were a year ago, when initial claims were 307,000.
- Russian President Vladimir Putin continues his conquest of Ukraine. New sanctions that begin today will increase to 119 the number of individuals who are subject to sanctions. In a nation of millions, that covers Vladimir Putin, some of his relatives and maybe the KGB’s staff in Penza.
- President Obama declared a “counter-terrorism campaign” against the Islamic State. This raises many questions, including, didn’t we already have a counter-terrorism campaign against the Islamic State? What’s the difference between a war and a counter-terrorism campaign? Why did you address the country on national television to declare non-war?
- And, for those willing to look farther ahead than the weekend’s football games, consider the new forecast from the Congressional Budget Office, showing that interest payments on U.S. debt will quadruple to $880 billion by 2024.
As Zerohedge notes, “This is just interest on debt, and doesn’t even include the costs of repaying the principal. … Last year the government spent more on interest payments (c. $700 bn.) than it did on Medicare (a little under $600 bn.).”
And, of course, we could go on.