The Federal Reserve & the TSX

Falling off a cliff

Malcolm Morrison, writing for the Canadian Press, is predicting a tough week ahead for the Toronto stock market. He blames the fiscal cliff.

The Toronto stock market will likely be in for another week of lacklustre activity as the apparent lack of progress to arrive at a deal to stop the U.S. economy going over a “fiscal cliff” leaves buyers firmly sidelined.

“I think that’s exactly what we’re going to see in the market … certainly between now and the end of the year until a deal is struck,” said Philip Petursson, director of institutional equities at Manulife Asset Management.

“I think that what we are seeing in the U.S. markets is purely sentiment-driven, it’s not fundamentally- driven.”

The “fiscal cliff” is the name for a situation that would arise at the end of December if substantial tax increases and spending cuts are triggered. The worry is that the moves would immediately cut into economic growth, likely sending the U.S. into recession and taking other world economies along with it.

First, a point of reference on the fiscal cliff. In this case, “spending cuts” mean reductions in the rate of projected spending increases. Make no mistake, annual US-government spending will continue to increase. This is the rationale by which politicians explain that spending more is spending less.

Picture a husband who owns a perfectly serviceable Toyota Camry. He then purchases an Audi A6. His wife, irked by this considerable expenditure, is told that the family has actually spent less money. As it turns out, he originally planned to buy a Porsche Panamera instead.

Next, we hear that Ben Bernanke and the U.S. Federal Reserve have a plan to swoop in and save the economy.

Now, economists expect that the Fed will begin buying $40 million of long-term treasury securities each month.

This would be on top of an existing plan announced in September that involves the Fed buying $40 billion per month in mortgage-backed securities.

“If we get that plus hints of a fiscal deal, that could be icing on the cake for the markets,” said Peter Buchanan, senior economist with CIBC World Markets.

The problem? It is all smoke and mirrors. So far, Bernanke is bluffing on QE3. Have a look at the Federal Open Market Committee (FOMC) adjusted monetary base, which records the Fed’s holding of assets that serve as legal reserves for the money supply. It is the best indicator of Federal Reserve Policy.

The financial media remains in the dark about this. Until such time as the Fed does what it says it is doing, take any future predictions of a credit-induced recovery with a grain of salt.

(HT Gary North)

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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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