dailyreckoning.com.au / By Dan Denning / February 22nd, 2013
Bubble management is a delicate business, especially when you’re ham-fisted. This is surely the lesson of the week. American central bankers floated a trial balloon. It was a simple idea. Maybe they wouldn’t stay indefinitely committed to buying bonds and keeping interest rates low.
The market’s verdict on the idea was swift and furious. Aussie stocks fell 2.3%. Up until yesterday, the 5,000 level on the S&P/ASX 200 seemed within the grasp. After yesterday…it looks as elusive as ever.
But here’s the real question: should you take the Fed at its word? We know something important now, after the last 24 hours. Central banks can’t easily withdraw their monetary medicine without sending financial markets into an immediate delirium tremens. In order to save the patient, he must be permanently medicated. That’s what you call addiction.
Of course we could simply be over-reacting to the drama. There was a flurry of activity around our St Kilda offices yesterday. Alex Cowie was pounding the table to go long gold stocks. Murray Dawes fired out a sweeping short trade on the banks. And Kris Sayce floated serenely above the mayhem, looking for quality speculations in the small cap space.
Your editor sat and scratched his head. You can’t take these central bankers at their word. Stocks have gotten so far ahead of themselves (and earnings) that the authorities had to say something. They probably did not expect the notes from the January meeting of the Federal Open Market Committee to spark a global sell off. But they probably weren’t unhappy with it either.
In any event, here we are. Should you worry? Well, the time to worry is when you have time to worry. If you have time to worry, then it’s already too late to worry in any productive sense. Take a look at the chart below and you’ll see what we mean.