International Forecaster Weekly

Good News and Bad News

But for whatever ray of sunshine the largely misleading figure might bring to investors, there is another factor to consider: in the era of QE Infinity, good news is bad news. This is because the markets are trying to read the tea leaves to predict whether or not Bernanke and the Fed crew will announce the QE taper at the Fed's FOMC meeting next month.

James Corbett | August 7, 2013

Rejoice! The US federal budget deficit has shrunk to its lowest level in four years. The deficit now stands at 5.7% of GDP for the fiscal year that ended this past March 31st. Better yet, the deficit/GDP gap is expected to dip as low as 3.4% next year, almost in line with the 30-year average of 3.3%. Compared to the gap of more than 10% that stood at the end of 2009, this is surely good news, is it not?

            Well, no, it's not. First of all, the measure is deficit to GDP, not debt to GDP, meaning that the rate at which the debt is increasing compared to the GDP is tapering slightly, but it is still increasing. In fact, a chart of US public debt to GDP over that same four year window will show a steadily increasing figure. At the beginning of 2009, US debt to GDP stood at just over 75%. Today it is over 105% and climbing. So the fact that the deficit/GDP gap has been slightly reduced is, overall, not a hugely significant fact.

            But for whatever ray of sunshine the largely misleading figure might bring to investors, there is another factor to consider: in the era of QE Infinity, good news is bad news. This is because the markets are trying to read the tea leaves to predict whether or not Bernanke and the Fed crew will announce the QE taper at the Fed's FOMC meeting next month. When positive economic news comes out, the markets are taking it as a sign that the economy is looking strong and thus the Fed will be more likely to ease off of the quantitative easing gas pedal, meaning less liquidity and less money flowing into equities. Thus, every time we see strong, positive economic numbers coming out, the markets are actually contracting.

            A case in point has been the market climbs and clawbacks over the past week. The S&P 500 broke through 1700 for the first time last week and stocks ended up 1.1% on the week as the Fed was able to convince the markets that they were going to be maintaining their stimulus, but better-than-expected data, including a narrower-than-forecast US trade deficit and higher-than-expected corporate earnings left the markets paring back in expectation that the Fed will use the strong data to justify an early tapering.

            As of press time, all eyes are locked on key FOMC voting member and Chicago Fed President Charles Evans, a strong stimulus supporter, who is due to speak to reporters today. Regardless of whether he tips a hand toward continued stimulus, a tapering in stimulus, or doesn't reveal anything at all, the key point is that the economy is now hanging on every word of the central bankers. What clearer indication that the US economy is completely controlled by the privately owned central bank is possible?

            Meanwhile, markets will continue this up-and-down motion throughout the month as everyone gears up for the big reveal in September.