Indeed, for one week it seemed that investors wanted to sell any and all assets they owned. This represented a stark departure from the patterns we had experienced over the four years since the stock market bottomed in March, 2009.
While we certainly had "corrections" in stock prices over this four-year period, the sale of stocks was generally accompanied by the widespread purchase other assets (such as Treasuries and/or Gold). The media parlance for these stock market corrections had been "risk off", as investors shed riskier assets in favor of "safer" ones. But as we are seeing now (and as we have repeatedly warned our readers), longer-term Treasury bonds may not be as safe as many had thought.
The impetus for all this selling was the Fed's rhetoric last week, which suggested to some that the central bank is ready to "taper" its asset purchases. For our part, we are not so convinced. We do believe that the Fed is very encouraged by the recovery in the housing market. We have long held the opinion that the Fed is laser-focused on housing.
However, other sectors of the economy do not appear to be recovering nearly as fast as they should. While the unemployment rate is down to 7.6 percent from a high of 10.0 percent (October, 2009), the labor participation rate continues to suggest that jobs are very hard to find. Moreover, growth in average incomes remains anemic for those lucky enough to have jobs. And finally, recent gauges of inflation suggest that the economy is experiencing disinflation rather than the 2 percent inflation rate that Fed governors would like to see.
All this evidence suggests to me that the Fed has a ways to go in meeting its dual mandate of maximum employment and stable prices. In other words, the Fed is not yet close to ending its monetary support.
This is not to say that we agree with what the Fed has done through its endless program of quantitative easing (QE). Our view has been that the Fed, through QE, is intentionally targeting asset prices in an effort to create jobs and economic activity through a Reagan-esque "trickle-down" maneuver. Bernanke has actually admitted this - repeatedly.
But while higher stock and housing prices may have helped put a floor under the economy for now, the longer-term ancillary effects are likely to be problematic. The Fed risks creating new asset bubbles, the likes of which led directly to the last two recessions.