Why are equity markets rising on bad economic information? A reasonable story is that the markets are expected a QE3. There were some clear objectives with QE2, raise risky asset prices to stimulate the economy, raise housing prices to help consumers, and increase inflationary expectations to offset the ravages of deflation, and cut the value of the dollar to help exports.
They were successful on some fronts. The dollar is lower and exports have increased. Unfortunately, the higher oil price have hurt the terms of trade and the balance of payments have not improved as much as expected. The housing market has stabilized but there is little improvement. This stability is very tentative given that housing is still on the ropes just not as bad as before. Stocks are higher even though corporations are having a hard time making investments decisions and have continued to hoard cash.
The latest Bernanke speach tlks baout an uneven economy so there is still something needed by the Fed. Theonly real option is buying more securities, so it is just a matterof time. If the eocnomy looks weaker, the chance of QE3 increases and forward looking markets will increase in price.
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