The second quarter has just begun, and there’s a brand new conventional wisdom!
It’s basically summed up in this tweet from hedge funder Doug Kass.
The liquidity rally is over.S and P futures -9, European mkts –, gold -40, euro. Time to be defensive just when shorts worn out. $SPY
— Douglas Kass (@DougKass) April 4, 2012
Banker and economist Daniel Alpert said the same thing this morning.
If you didn’t believe that mkts were trading on Fed/ECB liquidity pumping (and expected reaction of others to same) now’s the time to start!
— Dan Alpert (@DanielAlpert) April 4, 2012
This has been a huge raging debate, of course: Some people say it’s all Fed/ECB pumping that’s been driving markets.
Others point to fundamental improvements in the market, such as jobless claims hitting their lowest levels of the entire cycle right as stocks are hitting their highest levels.
But the events of the last couple of days have reinvigorated the central bank camp.
The timing of the Fed Minutes yesterday having a hawkish bent, combined with the weak performance lately in Italian/Spanish bonds (the LTRO sugar high is wearing off!) has got more people thinking that the market will soon be parched, and that the big selloff people have been calling for, for some time can now commence.
Along these lines, Scotty Barber of Reuters has updated this great chart of market reactions to ECB/Fed actions.
Photo: Scotty Barber, Reuters
On the other hand, we’d argue that the trend in markets has also explained markets quite well.
The fact of the matter is that we saw a big improvement in the data (relative to expectations) starting last fall, and now we’ve seen a clear string of misses relative to expectations, as this 1-year chart of the Citi Economic Surprise Index points out.
So even now, if the market falls, disentangling the market, the central banks, and the underlying economic reality will not be clear cut.