Buy the QE market dip

The markets have got it wrong … and there’s opportunity for serious investors.

Summary: The US economic recovery is good news, not bad. This week’s “Bernanke Setback” is yet another reason why we have to thank the forlorn Wall Street traders, and the excitable day traders, for providing us with this extraordinary gift: this opportunity to buy the dip.
Key take-out: Of all the markets impacted by the Bernanke Setback this week, none were more savaged than the Australian dollar. It’s a great buying opportunity.
Key beneficiaries: General investors. Category: Economics and strategy.

Earlier in the week I was starting to think it might be time for Federal Reserve chairman Ben Bernanke to make a strong leadership stand, and he has certainly done that.

The US dollar has celebrated his nothing but good news speech, while the US equity market has bizarrely sold off. This theme has been followed around the globe: currencies down, stocks down, like little ducks in a row.

Fed chairman Bernanke made some real world observations and projections. They were all good. Growth will return to trend, inflation will remain low, and official interest rates will be correspondingly kept near zero. This would normally be a no brainer. The market would rally. However, US market participants, Wall Street economists and analysts in particular have become addicted to the idea that they need “Uncle Sam” to save the day.

While US manufacturers and SMEs in general are rediscovering their entrepreneurial flair, on Wall Street people are stuck in a time warp. They have a permanent state of belief that there is a crisis. The name of the crisis changes but there is always a crisis, and the only way the markets can go up is if “big brother” in some form or another is doing something about it. Wall Street traders are constantly looking for a free ride from their government or the Fed, so fearful are they that they cannot stand on their own two feet and make it happen the good old-fashioned American way.

So while the Fed chairman stood there and clearly enunciated that the US economy was in good shape, perhaps even great shape, and that emergency quantitative easing measures would be wound back gradually over 3-12 months from now, all the Wall Street and day traders could hear was the free ride of $US85 billion bond purchases per month was coming to an end. Panic?

In truth all that really happened in the US markets on Wednesday was that the buyers stood aside. Why not? Why not see how far the market could fall on such a silly notion, that something that is no longer needed, is stopping. The buyers are still there however. The “need to buy” is still there. Because, even after one of the greatest bull markets in history, bizarrely most fund managers are still underweight. The investment world remains heavily weighted toward cash and bonds.

The down move in the bond market is one of the reactions I agree with. Yields have been held artificially too low all around the world for too long. This has helped tremendously with the soothing of the various sovereign debt challenges that have been faced, including that of the US. Things are likely to return to more normal levels going forward however. Especially as a great deal of bond selling has to be done, just to achieve reasonable equity portfolio weightings in the largest funds and institutions of the world.

This week’s “Bernanke Setback” is yet another reason why we have to thank the forlorn Wall Street traders, and the excitable day traders, for providing us with this extraordinary gift: this opportunity to buy the dip.

The market has indeed got it wrong. All the fundamental forces at work at the moment, forecasts by the Federal Reserve, and the plan for ending quantitative easing, are all strongly bullish news. Yes, markets do get it wrong. In fact, markets are always wrong. This is why markets move about so much. The price is always seeking the true and correct fundamental value that accurately represents the underlying asset, at which point, with full knowledge, supply would happily match demand. The reality is, we never have full knowledge, and the price is always wrong and seeking. The reason we have volatility is that markets are always wrong, and this week markets, at least Wall Street, got it very wrong.

The great news, however, is that markets being wrong is what gives us opportunity. It is very likely that in the “Grand Bull Market” sense, this week’s Bernanke Setback will be seen as a brief buying window, rather than a significant turning point.

Which leads us to the shrinking Australian dollar. Of all the markets impacted by the Bernanke Setback this week, none were more savaged than the Australian dollar. For the reasons of the resources boom not being over, yet now fully priced, a domestic economy that will rebound sharply in Q4, and the complete void of buyers that allowed the currency to fall so far, so quickly, the greatest investment opportunity on the global trading map at the moment, most probably, is the Australian dollar.


Clifford Bennett is chief economist of the White Crane Group at http://www.whitecranegroup.com.au/eureka/

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