In the short term at least, the Fed is unlikely to make any major moves at least until Operation Twist expires or the economy shows a significant downturn - Bad Goldilocks or not - said Deutsche Bank's Feinman. But the transition from a manipulated economy to a market economy is going to be extremely difficult." "We haven't had that for years and years. "They need a massive dose of free markets to invade the economy," Pento said. Doing so, though, would result in a sharp economic downturnthat ultimately would lead to a return to fiscal and monetary normalcy, something Pento doubts that the central bank has the collective stomach to endure. The Fed is in a box, said Pento, who would like the Fed to stop its easing measures. "Their main goal is to keep inflation expectations under wraps, but every time they make a move to create money they telegraph it as much as possible." Now, it's glasnost at the Federal Reserve and I think it's backfiring on them," Pento said. "Years and years ago, perhaps in the '70s and '80s, you had to guess what the Federal Reserve was doing. Yet Michael Pento, an economist and head of Pento Portfolio Strategies, sees the central bank as its own worst enemy, actually doing too much to telegraph policy and thus creating a cycle of dependency on Wall Street. Politics at the Fed? Ostensibly the central bank is supposed to operate above the wranglings on Capitol Hill and issue policy in strict accordance with its dual mandate of full employment and stable prices. And markets tend to not behave well when their fate is in the hands of politicians." The implication is that political events in 2012 will again take center stage at some point. "Investors just do not want to get caught again in this 'slope of hope' market where political grandstanding by both parties causes big sell-offs in markets (probably to political advantage)," said JPMorgan's chief market strategist Thomas J. This, then, is where "Bad Goldilocks" becames especially prevalent and pernicious - the Fed is prevented from taking strong actions because of political concerns, even as widespread worry over the pace of recovery looms large in the presidential electionyear. Investors abroad worry that political roadblocksin Washington also pose threats, and the Fed itself often has found itself at the center of the storm. In a recent series of meetings with European clients, JPMorgan Asset Management strategists found an equal level of worry overseas. They're almost waiting with a palpable sense of foreboding that things are going to get worse again." "It makes people cautious about having much conviction. "There's this sense of deja vu that people have, where we've seen this movie before where things start to look a little better then they slip back," said Josh Feinman, chief global economist at Deutsche Bank Advisors in New York. economic data has been making a less-than-convincing case for a robust recovery. Investor fear remains that the European debt crisis is about to accelerate, while U.S. Money continues to pour out of money market and stock-based mutual funds and into bonds, while stock market volume is down 23 percent from its 2011 levels. "We doubt the 40 rate cuts and over $1 trillion of asset purchases by central banks in the past six months are likely to be repeated in coming months."ĭespite a strong percentage gain in the stock market since the October lows, investors have been loathe to participate on a broad scale. And policy stimulus will be less potent for risky assets," Hartnett said. No longer is positioning in asset markets dangerously bearish. No longer can the economy only surprise to the upside. "The bullish drivers of risk assets since October are likely to fade. With the Fed set to meet next week, and as its Operation Twist selling and buying of bonds about to expire in June, the central bank's response to a fragile economic recovery will be crucial for investors. "We see risks of a 'bad Goldilocks' backdrop to financial markets in which the economy is neither 'cold' enough to provoke the quantitative easing that risk assets are now so cravenly dependent upon, nor 'hot' enough to provoke losses in bonds that would inspire a wholesale rotation out of fixed income into equities and commodities," Michael Hartnett, chief global equity strategist at Bank of America Merrill Lynch, wrote in a recent note to clients. Personal Loans for 670 Credit Score or LowerĪnd since the onset of the financial crisis, any sign that the Fed may back off from quantitative easing stimulus has been poison for the markets, which have been struggling as of late. Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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