Mere Pawns in Financial Chess Match

chessThe equity markets were down approximately 2% today without any overwhelming economic news. The news we did receive was decidedly mixed.

On the bearish side of the ledger, a measure of manufacturing activity in New York declined and confidence amongst homebuilders also declined. On the bullish side, the IMF announced that it is raising its 2009 forecast for economic activity in the United States. Taken together, those statistics would not typically generate a 2% downward move. So what happened?

Please recall from my posts “Greater Fool Theory“ and “What’s Driving the Market” that I believe the market is being driven by technical analysis and flows to a much greater extent than fundamental strength. Did we have any meaningful developments during the day or over the weekend to impact the technical support for our markets? I’m glad you asked. As Bloomberg reports, U.S., Global Stocks Drop as MSCI Falls Most in 2 Months:

Europe’s Dow Jones Stoxx 600 Index lost 2.5 percent after Group of Eight finance ministers, who met in Italy over the weekend, began drawing up contingency plans for rolling back budget deficits and bank bailouts as the economy shows signs of recovery and investors start worrying about inflation.

Recall that technical support is predicated strictly on new flows of cash entering the market to provide support and push prices to higher levels. There is no real fundamental analysis that supports these flows. While some economists may believe there are hints of global economic recovery, those debates are ongoing. The fact is, much like in a “shell game,” when a dealer (like a government) gives a hint that he plans on pulling some chips off the table, other players will do the same.

That line of reasoning developed at the G-8 conference and carried over into the market. Why did the G-8 express concerns about deficits and bailouts and inflation? Very simply, when interest rates move higher by 1% over the course of 6-8 weeks, they are sending a strong signal that there is a problem brewing. Even Dallas Fed governor Richard Fisher acknowledges that the Fed can only do so much to support the massive deficit spending and fiscal deficits. Bloomberg reports, Fisher Says Fed Can’t Offset Treasury-Borrowing Flood:

The Federal Reserve isn’t capable of offsetting the “flood” of U.S. Treasury borrowing with its bond-purchase program, which is helping to revive credit markets, Dallas district-bank President Richard Fisher said.

“The program has had its impact,” Fisher said today in an interview with Bloomberg Television. “At the same time, you cannot counter this enormous flood” of borrowing “coming from the United States Treasury.”

The Fed’s efforts to stimulate the economy are complicated by rising Treasury yields, which push up the cost of mortgages even after policy makers have lowered short-term interest rates near zero.

On the one hand, G-8 ministers are indicating the need to pull in their fiscal reins. On the other hand, Fed governor Fisher is indicating the Fed can’t support Treasury borrowing singlehandedly.

Do you get the sense we are all mere pawns in this massive game of financial chess going on around us?

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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